Black Knight

A company offering or executing a hostile takeover of another company

What is a Black Knight?

In corporate finance, a company that is offering or executing a hostile takeover of the target company is termed a black knight. A hostile takeover is an acquisition attempt by a company or raider that the target company resists.

For example, Company A is a publicly traded company that wants to expand into a new market. Company A approaches Company B with an offer to its Board of Directors (BoD). After consideration, Company B refutes the offer as it is not in their best interest. If Company A proceeds with a takeover after being rejected by Company B’s board of directors, it is deemed a hostile takeover and Company A would be referred to as a black knight.


Black Knight


Reasons for a Takeover

There are several factors that can influence a company to take over another company. Ultimately, it comes down to the long-term strategic goal of the acquirer. Below are the most common reasons as to why companies are acquired:


1. Enhancing business abilities

Taking over a company can improve efficiency, increase the effectiveness of marketing products and services, and increase turnover and sales.


2. Acquiring a larger market share 

It is often difficult to gain a larger market share. A takeover of a competing firm would result in a larger market share and less market competition.


3. Product and service diversification

Taking over another company allows for product and service diversification and improved profitability.


4. Minimizing business operation costs

If the merging companies manufacture similar products, production efficiency can be utilized to reduce production and management costs.


5. Replacing the management team

If the acquirer believes the target company is poorly run, the company can acquire the target company and replace the management team. Doing so can greatly increase business performance and profitability.


Hostile Takeover Strategies

There are several tactics that a black knight (acquirer) can employ to take over a target firm after the target company’s management rejects a bidding offer.


1. Tender Offer 

A tender offer is an offer to purchase shares from the shareholders of the target company at a premium to the market price. The takeover company executes a tender offer directly to shareholders, thus bypassing the board of directors’ consent. The objective is to acquire enough shares to gain a controlling interest in the target company (>50%).

Company A’s current stock price is $20 per share. A black knight attempting a hostile takeover of the company could issue a tender offer of $40 per share to current shareholders contingent that he or she acquires at least 51% of the shares (controlling interest).


2. Proxy Fight

A proxy fight is when the acquirer persuades existing shareholders of the target company to vote out the board of directors. This makes the company easier to take over as the replacement board members would be typically more open to changes.

Company B is attempting a hostile takeover of Company A. By employing a proxy fight strategy, Company B persuades the shareholders of Company A to vote out the company’s current board of directors. After the removal of the board of directors, shareholders will install new board members who are more receptive to change.


Defenses Against a Hostile Takeover

A target company can defend against unwanted hostile takeovers through several controversial strategies.


1. Poison Pill

A poison pill strategy is used to make the stocks of the target company less attractive to the acquirer. This strategy is employed by making the target company’s stock expensive.

A poison pill strategy can involve giving existing shareholders the option to buy more stocks at a discount. This will increase the number of shares the acquirer will need to purchase to gain a controlling interest.


2. Golden Parachute

A golden parachute is a large financial compensation given to company executives if the company is taken over or if the executives are dismissed. Golden parachutes are contracts that are given to key executives.

The CEO of the target company can sign a golden parachute contract that gives him or her a compensation if there is a change of control in the company or if he or she is dismissed. For example, the golden parachute contract of Hewlett-Packard Enterprise CEO Meg Whitman will provide her with $91 million if the company is acquired and $51 million if she is terminated. Read more here ->


3. Supermajority

A supermajority requires at least 70% of shareholders to approve any acquisition. This will make it more difficult for a black knight to take over the target company as they need to purchase more stocks for a controlling interest.


The White Knight

A white knight is a company or individual that acquires a company that is in the process of being taken over by a black knight. A white knight is deemed the rescuer of the target company because unlike a hostile takeover in which the management team and core business are altered, a white knight scenario typically retains current management and keeps the core business intact.


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