Definition
In the financial world, a White Knight is a business, individual, or entity that steps in to help a company facing a hostile takeover bid by another company (the black knight). The white knight’s objective is to acquire majority control, but unlike the hostile company, they maintain more favorable terms with the managers or executives of the company at risk. It’s considered a friendly alternative as they plan to keep the current management and employees, or implement changes less drastically.
Phonetic
The phonetics of the keyword ‘White Knight’ would be /ˈwaɪt naɪt/.
Key Takeaways
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- The term “White Knight” originates from medieval chivalric romances, and it often represents a hero who comes to the rescue, generally in business scenarios.
- In business terms, a White Knight is a person or company that comes to the aid of another, usually larger company, that is facing a hostile takeover attempt.
- The White Knight typically offers more favorable terms for the takeover, which can allow the company being targeted to remain independent or preserve current management structures.
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Importance
The term “White Knight” is crucial in the field of business/finance because it refers to a company or an individual that rescues a corporation from a hostile takeover attempt. Hostile takeovers can negatively impact an organization’s operational dynamics, strategic direction, and employee morale. When a white knight comes into the picture, it acquires or merges with the threatened company, preventing the hostile takeover and potentially retaining the existing management team. By doing this, the white knight is often seen as a savior, protecting the company’s interests, saving jobs, and ensuring continuity of the original company’s direction or vision. Thus, the concept of a white knight serves as an essential protective mechanism in corporate finance.
Explanation
A White Knight is a term widely used in the business and financial world, primarily in the context of takeovers and mergers. The purpose of a White Knight is to safeguard a company from a hostile takeover by another entity. When a company is being targeted for a takeover, and the management is not in favor of this, they would look for a White Knight, an individual or a company that will help them by acquiring a substantial amount of their stake, thereby preventing the hostile takeover.The objective is to preserve the integrity and stability of the company being targeted, while also ensuring that it can continue to function smoothly without falling prey to aggressive takeover bids. The White Knight is often seen as a protector, one that steps in to defend the entity, mainly when it is unable to protect itself, earning the image of a rescuer. This strategy not only helps the company in distress but also provides potential benefits to the White Knight, such as increasing its market share or diversifying its business model.
Examples
1. Berkshire Hathaway – Kraft Heinz Rescue: Heinz was facing a severe financial crisis in 2012, and Warren Buffet’s Berkshire Hathaway stepped in as a “White Knight” by investing $28 billion into the company. Such a significant investment helped Heinz to recover from its bleak economic situation.2. Microsoft – Apple Rescue: In 1997, one of the most iconic examples of a “White Knight” rescue took place when Apple was in poor financial shape, losing one billion dollars during a fiscal year. In an unexpected move, Bill Gates announced Microsoft would invest $150 million into Apple. Though the investment was minimal, giving only a temporary relief, it boosted enough investor confidence.3. Renault-Nissan Alliance: In 1999, Nissan was facing financial strain and was on the brink of bankruptcy. Renault, a French auto company, agreed to invest $5.4 billion for a 36.8% stake in Nissan. This “White Knight” intervention allowed Nissan an opportunity to rebound and return to profitability, and resulting in a successful alliance between the two automakers.
Frequently Asked Questions(FAQ)
What is a White Knight in finance and business terms?
A White Knight is a friendly company or individual that acquires a corporation at risk of a hostile takeover by another entity or individual. It’s an action considered as a rescue because the conditions offered are more favorable.
What is the importance of a White Knight in a business scenario?
In case of a hostile takeover encounter, a white knight can be a savior for companies that want to avoid such situations. They come to the rescue by offering a more appealing acquisition plan, thus ensuring the safety of the acquired company’s interests.
How does a White Knight operate?
A White Knight involves getting an invitation from the target company’s board of directors to buy stakes in the company to prevent a hostile takeover. It’s a strategic move often incorporating more favorable terms and outcomes for the target company.
Are White Knights always successful in their rescue attempts?
Not always. The success of a White Knight’s acquisition attempt depends on various factors, such as the attractiveness of its offer compared to the hostile bidder, the attitudes of the target firm’s shareholders, and the existing market trends and regulations.
What’s the difference between a White Knight and a White Squire?
A White Squire is similar to a White Knight in that they both are invited to prevent hostile takeovers. However, a White Squire buys less stake in the company than a White Knight, enough to block the takeover but not enough to gain control of the company.
Can a White Knight turn hostile?
Yes, while it is uncommon, a White Knight can turn hostile. This can happen if disagreements about management, control, or changes in strategy occur after the acquisition.
What risks do White Knights face?
Risks can include integration challenges post-acquisition, potential financial strain caused by the acquisition, and unexpected problems discovered within the target company after the acquisition.
Does a White Knight need an approval from the target company to intervene?
Yes, usually a White Knight cannot intervene in a hostile takeover bid unless invited to do so by the target company’s board of directors.
Why would a company prefer a White Knight instead of a hostile takeover?
A company might prefer a White Knight because they generally offer better terms, may allow existing management to remain in place, and align more closely with the target company’s business goals and culture.
Related Finance Terms
- Hostile Takeover
- Mergers and Acquisitions
- Shareholder Rights Plan
- Corporate Governance
- Private Equity
Sources for More Information
- Investopedia: https://www.investopedia.com/terms/w/whiteknight.asp
- The Balance: https://www.thebalance.com/what-is-a-white-knight-4588286
- Corporate Finance Institute: https://corporatefinanceinstitute.com/resources/knowledge/strategy/white-knight/
- Economic Times: https://economictimes.indiatimes.com/definition/white-knight
