A White Knight is a preferred bidder chosen by the management of a target company during a hostile takeover to complete the acquisition. The firm is often seen as coming to the rescue of the target and participating in a deal on more friendly terms. The purchase arrangement usually keeps the existing management structure intact, or secures other terms beneficial to management. Although the maneuver is seen as a hostile takeover defense, the target is still ultimately acquired thus losing its independence.
The acquiring firm can be a company or individual and often has some existing relationship with the target firm be it economical or personal. White Knights were often sought in the times of the corporate raider. Using this tactic, the target firm could keep usually keep the core aspects of the firm intact. This could help preserve jobs and company status whilst not necessarily focusing on the benefits to management. Target firms whose local status in the community could be threatened would often use this tactic.
A notable example of a white knight was the acquisition of Bear Stearns that prevented their insolvency by JPMorgan Chase during the financial crises in 2008.
Additional Variations of the White Knight
Black Knight
In a hostile takeover situation, the hostile bidder is referred to as the black knight. The reference implying the competitiveness of the situation comes from the game of chess where the white and black knights are adversaries
White Squire
A white squire is similar to a white knight. Both terms refer to a third party “friendly” investor or firm that is helping a company in its defense of a hostile takeover approach. The difference however is that a white squire does not intend to purchase the target firm. Instead, the squire enters the stock market and purchases stock in the target company. However, occasionally stock purchases or loans may be accomplished by alternative means. When a sufficient position has been accumulated, the squire is able to help prevent the hostile takeover by using the new ownership power accordingly. A firm may choose to offer this assistance to help maintain existing business relationships and possibly for financial gain as well. Once the black knight abandons its takeover attempt, following a successful defense, the white squire will look to sells their holding in the target firm usually on the open (secondary) market.
Grey Knight
In addition to a white knight and black knight, a third potential takeover candidate called may also make an appearance. This is additional player is referred to as a gray knight. A gray/grey knight sits between the white and black knights have characteristics of both. Therefore, the grey knight will not be as desirable as a white knight, but will be more desirable than a black knight. The gray knight is a potential bidder, who in a hostile takeover who outbids the white knight. This action however is done to serve its own interests.
Yellow Knight
A further color is also known but referred to less often. A yellow knight is a company that was initially planning a hostile takeover of a target firm, but subsequently backs out of the process. Preferring instead to accomplish the merger or acquisition on friendly terms with the target.
