White Knight

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21 Aug, 2024

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Table Of Contents

What is White Knight?

A white knight is an investor who is considered friendly to the company as that person acquires the company with the help of the company's board of directors or top-level management at a fair consideration to protect the company from a hostile takeover attempt by the other potential buyer or bankruptcy.

Despite the fact that the company loses authority or decision-making powers, the white knight defense ensures that the decisions taken by them would be in the favor of the organization and its shareholders. The knight ensures that a friendly company takes over the company’s business rather than a hostile entity.

What is White Knight?

A "white knight" is an investor who helps a company by purchasing it at a fair price with the approval of the company's Board of Directors or top-level management.
This prevents other potential buyers from taking over the company or attempting a hostile takeover that could lead to bankruptcy.
The concept of a white knight arises when a company is at risk of being taken over in a hostile manner. In such a situation, a white knight can support and help the company grow.

White Knight Explained

A white knight is an individual that acts as the defensive entity for a company amidst a takeover. The white knight business is to ensure the takeover is being executed by a friendly entity and that the decisions made during the whole process are in the favor of the business and its shareholders.

When a company becomes a target for a hostile takeover, then the company needs to be saved by somebody who would help the company grow. At this point, the concept of the white knight comes into existence.

It is an individual or a company that takes over a target company and saves it from a hostile takeover from a black knight (a black knight is an individual or a company that takes over a company by force). By being taken over by a white knight, the company still can’t remain independent. But it’s far better than being taken over by a black knight.

Examples

The business world as such is extremely competitive and ruthlessly so by nature. However, for companies with bankruptcy or takeover hovering over their heads, they usually strive to sort their white knight defense. Historically, there have been multiple companies who have opted for such defensive measures. Let us understand the concept in depth with the help of a few examples.

In the year 1953, the American Broadcasting Company was nearly bankrupt. At that time, United Paramount Theatres came to the rescue for American Broadcasting Company (ABC) and acted as a white knight buying ABC.
In 1984, Walt Disney Productions faced a hostile bid from Saul Steinberg. Sid Bass and his sons acted as white knights and saved Walt Disney by buying significant portions.
In the year 1998, Digital Equipment Corporation was in pretty bad shape. At that time, Compaq came to the rescue. By merging with Digital Equipment Corporation, Compaq acted as a white knight.
In 2006, there was much talk about the merger of Mittal Steel and Arcelor. At that time, Severstal acted as a white knight to Arcelor.
In the year 2008, JPMorgan Chase acquired Bear Stearns. Bear Stearns was struggling to keep their stock price up at that time. And if JPMorgan Chase would not have acquired them, they would need to file for insolvency. At that time, JPMorgan Chase acted as a white knight.

How Can The Target Company Save Itself ?

Despite letting a friendly individual carry out their white knight business, it is only one of the handful of measures taken by companies to prevent a hostile takeover. Nevertheless, it is one of the foremost and the strongest lines of defense as this individual usually goes the extra mile to ensure no step in the process is away from the best interest of the company’s business and its investors’ well-being.

source: moneycontrol.com

Since the year 2000, it found that whenever there was a hostile takeover, it didn’t amplify its value. The unwilling target company, which was taken over by force, couldn't amount to more than $10 billion.

So, we can easily state that no hostile takeover was ever successful. Every company, thus, whenever they become a target for a hostile takeover, needs to make a great effort to find out a white knight.

Otherwise, the near future of the target company would be the following –

There would be no independence/autonomy in the company. And as a result, the company will lose its way, and they need to adhere to the whims of a black knight.
Secondly, the company would lose its vision, values, and future.
Thirdly, the company wouldn’t create value for its employees, customers, and stakeholders.

For a business, this is the worst scenario. And that's why it's important to find someone who would take over the company in preferred terms (even when there won't be full autonomy). In a few cases, it also acts as a savior for companies that will be bankrupt.

But, every target company doesn’t need such a savior. If the target company is way bigger or one of the largest companies in the industry, they need a knight even when they face a chance of a hostile takeover.

Frequently Asked Questions (FAQs)

1. Can a white knight acquisition be detrimental to a company's finances?

Yes, a white knight acquisition can be detrimental to a company's finances if the acquisition is overpriced or if the target company has significant financial or operational challenges that the white knight cannot address. Additionally, if the acquisition is not in line with the white knight's core competencies, it could negatively impact their business in the long run.

2. What are some cases of successful white knight acquisitions?

One case of a successful white knight acquisition is Microsoft's acquisition of LinkedIn in 2016. LinkedIn was under threat of a hostile takeover by another company, but Microsoft stepped in and acquired the company for $26.2 billion. The acquisition allowed Microsoft to expand its presence in the social media space and gain access to LinkedIn's user base of professionals.

3. What are some advantages for a company to become a white knight?

Becoming a white knight can provide a company with strategic benefits such as gaining access to new markets, diversifying its products or services, and increasing its market share. Additionally, it can enhance the company's reputation and brand value, positively impacting its future business prospects.