Definition
A White Knight, in the context of finance, is a company or individual that acquires or intends to acquire a corporation at a fair consideration during a time when the corporation is facing a hostile takeover from another potential acquirer. The intention of a White Knight is to help the takeover target avoid falling into the hands of the hostile bidder. Often, the White Knight’s terms are more favorable and suit the preferences of the target company’s management and board of directors.
Key Takeaways
- A White Knight is a term used in finance to describe a company that comes to the aid of another company that is under the threat of a hostile takeover. In other words, a White Knight is regarded as a ‘rescuer’ in business scenarios.
- The primary purpose of a White Knight is to help the target company avoid a hostile takeover by offering more favorable and friendly acquisition terms. This is typically beneficial for the shareholders and management of the target company.
- While the White Knight’s intervention helps the target company, it’s not purely altruistic; White Knights often stand to gain strategically important assets, market position or other significant business advantages through their actions.
Importance
In the realm of finance and business, the term “White Knight” holds significant importance because it refers to a company or individual that rescues a targeted company from a hostile takeover bid, often by acquiring the firm themselves.
This intervention is crucial for the targeted company as the intentions of the White Knight are generally considered more favorable than those of the hostile bidder.
The targeted company seeks out the assistance of the White Knight in order to preserve its business operations, maintain its management team, and secure the interests of its employees and stakeholders.
Hence, a White Knight plays a critical role in corporate takeovers, influencing the power dynamics and ultimate fate of the companies involved.
Explanation
A white knight in finance is typically deployed to prevent hostile takeovers, serving a critical protective role for companies that find themselves vulnerable. The moniker takes after the chivalrous knights from medieval folklore, occupying a rescue mission by stepping in to save the day.
For instance, a corporation facing a threat of a hostile takeover from a predatory entity will seek out the help of a white knight – another friendly company willing to acquire it on agreeable terms. These terms are perceived to be more favorable and beneficial in order to stave off the bid from the so-called ‘black knight’, or the hostile bidder.
The purpose of the white knight is, fundamentally, to ensure the interest of the besieged company and its stakeholders, who might be unwilling or unprepared to succumb to the hostile takeover. They protect the target company from the potential adverse effects like job losses, asset-stripping, and change of company direction among others, associated with hostile takeovers.
Meanwhile, the white knight can also acquire a strategic asset or gain control over a rival business as it swoops into the rescue. Thus, the intervention of a white knight is tactically used as an attractive corporate strategy in mergers and acquisitions.
Examples of White Knight
Berkshire Hathaway and Goldman Sachs (2008): In one of the most notable instances of a white knight acquisition, Warren Buffett’s Berkshire Hathaway invested $5 billion in Goldman Sachs during the 2008 financial crisis. This investment helped stabilize Goldman Sachs, a company that was experiencing significant financial struggles at the time, and the endorsement from a well-respected investor like Buffett helped lift investor confidence in the company.
Air France and KLM (2003): In 2003, KLM Royal Dutch Airlines was in financial trouble and facing potential competition-based takeovers. Air France emerged as a white knight, agreeing to a merger that would help KLM financially and increase their combined market presence. The merger ended up being successful, resulting in one of the largest airlines in the world.
Lenovo and IBM (2004): Back in 2004, IBM’s personal computing division was struggling and on the verge of collapse. Chinese company Lenovo stepped in as a white knight and purchased the PC division. This acquisition not only saved the division, but it also allowed Lenovo to expand its footprint and become a global contender in the PC market.
FAQs on White Knight
What is a White Knight?
A White Knight refers to a company or individual that acquires a corporation on the verge of being taken over by a hostile bidder or a ‘black knight’. The white knight rescues the targeted firm by offering a better and friendlier deal.
What is the role of a White Knight in finance?
In the world of finance, a White Knight is a savior of a company in the face of a hostile takeover. The White Knight provides a better deal, maintaining the company’s management and brand, and thus, saving it from possible dismantling or harsh terms set by the hostile bidder.
How is a White Knight different from a White Squire?
While a White Knight acquires majority stake in the company under the threat of a hostile takeover, a White Squire acquires a smaller stake. The White Squire’s acquisition is enough to prevent the takeover, but not large enough to threaten the current management’s control over the company.
What is the benefit of a White Knight takeover?
A White Knight takeover often results in better terms for the target company. This could include maintaining the current management, ensuring job security for employees, preserving company culture, and considering the best interests of the company rather than prioritizing profit.
Related Entrepreneurship Terms
- Hostile Takeover
- Takeover Defense
- Merger
- Acquisition
- Corporate Finance
Sources for More Information
- Investopedia: Investopedia is a leading financial, educational, and instructional website that provides an extensive database of financial terms, including the term “White Knight”.
- Corporate Finance Institute: This site offers professional courses and free resources about different financial topics. It has detailed explanations of various corporate finance terms like “White Knight”.
- The Balance: The Balance is known for its comprehensive and practical advice on different personal finance and money matters. It may provide information on the term “White Knight” and related topics.
- Nasdaq: Nadaq being a global electronic marketplace for buying and selling securities, its official website provides extensive information and news related to finance and can be a good source for understanding the concept of a “White Knight”.
