White Knight

White Knight defense: A white knight is a hostile takeover defense whereby a friendly company purchases the target company instead of the unfriendly bidder.

What is a White Knight?

In the world of business and finance, a “White Knight” is a term used to describe a company or an individual that comes to the rescue of another company that’s facing a hostile takeover bid from a third entity. The White Knight offers a friendly takeover bid, which is more acceptable to the management of the target company.

What Is a Hostile Takeover?

A hostile takeover is a type of acquisition where the acquiring company seeks to take over a target company against the wishes of the target company’s management and board of directors. This is typically done by going directly to the shareholders, either by making a tender offer or through a proxy vote. The key characteristic of a hostile takeover is that the company’s management does not want the deal to go through.

How Does a White Knight Hostile Takeover Defense Work?

When a company is under the threat of a hostile takeover, it may seek the help of a White Knight. The White Knight steps in by offering a friendly takeover bid, which is more favorable to the target company’s management. This can be in the form of a higher price per share or better terms and conditions. The idea is to make the White Knight’s offer more attractive to the shareholders than the hostile bidder’s offer, thereby saving the company from the hostile takeover.

Examples of a White Knight Defense

  • RJR Nabisco. One of the most famous examples of a White Knight defense occurred in 1988 when tobacco giant RJR Nabisco was the target of a hostile takeover bid by its own executives. In order to fend off this leveraged buyout, RJR Nabisco invited several entities to make competing bids. The company ultimately accepted the bid from investment firm Kohlberg Kravis Roberts & Co., acting as the White Knight, which offered a higher price.
  • Walt Disney Productions. Fast forward to 1984, Walt Disney Productions was under threat from a hostile takeover bid by Saul Steinberg. Sid Bass and his sons emerged as white knights, purchasing significant shares and effectively rescuing Walt Disney.
  • Digital Equipment Corporation. In a similar vein, 1998 saw the Digital Equipment Corporation in dire straits. Compaq intervened at this critical juncture, merging with the struggling company and playing the role of a white knight.

White Knight Pros

  1. Better Terms and Conditions: A White Knight often offers better terms and conditions for the takeover, which can include a higher price per share or a commitment to safeguard jobs.
  2. Preservation of Company Culture: A friendly takeover by a White Knight often means that the company culture is more likely to be preserved.
  3. Management Retention: The existing management is more likely to be retained under a White Knight takeover.

White Knight Cons

  1. Limited Options: Once a White Knight is involved, the target company may have limited options to negotiate with other potential buyers.
  2. Potential for Overvaluation: In an effort to outbid the hostile party, a White Knight might overvalue the company, leading to financial issues down the line.

The Benefits of a White Knight

The main benefit of a White Knight is the preservation of the target company’s interests. This can include the company’s culture, its management team, and its strategic direction. Additionally, a White Knight can offer a higher price per share, benefiting the shareholders.

Variations on the White Knight

There are several variations on the White Knight strategy:

  1. Gray Knight: This is a second bidder that enters the scene after the White Knight has already made its bid. The Gray Knight’s bid may or may not be more favorable than the White Knight’s.
  2. Black Knight: This is a company that was once a White Knight but has turned hostile.
  3. White Squire: This is a friendly investor who buys a smaller stake in the company to help fend off the hostile bidder.

How Can The Target Company Save Itself?

Apart from seeking a White Knight, there are several other strategies a company can use to defend itself against a hostile takeover:

Poison Pill Defense

The Poison Pill defense involves issuing new shares to existing shareholders at a discount, making it more expensive for the hostile bidder to acquire a controlling stake. The poison pill strategy, first implemented in the 1980s in New York, was the brainchild of the New York-based law firm Wachtell, Lipton, Rosen, and Katz. The term draws its inspiration from the lethal pill spies would carry, ready to ingest if captured by adversaries to avoid interrogation and torture.

The application of the poison pill defense in the corporate world operates on a similar principle. Shareholders of the target company are granted the right to buy additional shares at a discounted rate. When the potential acquirer’s stake in the company reaches a certain threshold, these rights are activated for the remaining shareholders.

This defensive tactic effectively dilutes the acquirer’s stake in the company, rendering the takeover less attractive. It also ensures that the company’s management retains control and the interests of minority shareholders are safeguarded.

Crown Jewel Defense

The Crown Jewel Defensive tactic, often dramatized in films and television series, involves the target company selling off its most valuable assets or business divisions, thereby diminishing its appeal to the potential acquirer.

Typically employed as a last resort to ward off a hostile takeover, this strategy essentially involves the company deliberately undermining its own business due to the circumstances.

The term “crown jewels” in a company refers to its most valuable and profitable assets or divisions. These not only generate substantial profits but also significantly contribute to the company’s asset value and future prospects. The nature of these crown jewels varies across industries and individual companies. For instance, in the manufacturing sector, factories or proprietary manufacturing techniques are often considered the crown jewels.

In most scenarios, the target company sells its crown jewels to a friendly third party, often known as the White Knight. Once the hostile bidder withdraws their takeover attempt, the target company repurchases the crown jewel at a pre-agreed price. The crown jewel defense temporarily destabilizes the company until the jewel is reacquired.

Pac-Man Defense

As the name implies, this defensive strategy draws inspiration from the Pac-Man video game. Instead of being the subject of acquisition, the target company flips the script and attempts to take over the bidder.

To execute this strategy, the target company requires a “war chest,” which is a substantial reserve of cash and other assets set aside to handle unexpected situations like a hostile takeover.

This cash reserve is not left idle within the company; instead, it is invested in highly liquid assets such as treasury bills, which can be readily converted into cash as needed. Assets with high liquidity are considered cash equivalents and are sometimes simply referred to as cash.

A typical Pac-Man defense unfolds as follows:

  1. The bidder initiates a hostile takeover of the target company by purchasing a significant number of the target’s shares to gain control of the company.
  2. The target, recognizing the unfolding situation, employs the Pac-Man strategy to thwart the hostile takeover. They utilize their war chest to buy an even larger number of shares in the bidding company.
  3. Upon witnessing the dilution occurring in their own company, the bidder typically abandons the hostile takeover attempt.

In essence, it’s a case of fighting fire with fire. A hostile takeover is met with a counter-hostile takeover. At times, target companies may also secure external funding to facilitate their hostile takeover of the bidding company.

In conclusion, the White Knight defense is a powerful strategy that can help a company fend off a hostile takeover. However, like all strategies, it comes with its own set of pros and cons, and it’s important for companies to consider all their options before deciding on the best course of action.

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