Yellow Knight

A company that originally attempted a hostile takeover, but later opted for a merger

What is a Yellow Knight?

A Yellow Knight is a company that attempts to mount a hostile takeover of another company but ends up discussing the idea of a merger with the target company. The change in strategy may occur when the targeted company disapproves the hostile takeover, and the acquirer is forced to be friendlier to renegotiate the deal. The reference to the color yellow indicates fear because the former aggressor’s dropped the takeover bid and is now attempting to establish connections with the target for a mutually beneficial relationship.


Yellow Knight


There are several reasons why a company may change tact from a hostile takeover to a friends merger or acquisition. One of these reasons is the unlikely success of the takeover. The acquirer may decide that the takeover attempt is no longer feasible as initially planned, due to the need for more resources than the company can afford and the resistance from the target company. The company may propose a merger that benefits both parties if there is a compelling reason that a merger will achieve positive outcomes.

A company may also move from a hostile takeover to a merger due to a change of circumstances in the target company. Between the time the acquirer decided to attempt the takeover and the actual date of the takeover, some events may occur that may force the acquirer to go back to the drawing board. Such events may include a drop in the target company’s revenues, destruction of the target’s primary assets in a natural disaster or closure of critical lines of business of the target. The acquirer may decide that the takeover will require a lot of resources that could be put to better use if the two parties merged to form a single company.


Factors for a Yellow Knight to Consider

Once the acquirer drops the hostile takeover attempt and agrees on a merger with the target company, several factors should be considered to ensure that the new relationship is beneficial. These factors include:


Financial Impact

The primary objective of the acquirer is to increase the revenue and net profits. The acquirer should first analyze the Earnings per Share (EPS) to decide if it is feasible or not. Merging through EPS can be either accretive or dilutive. An accretive merger is a favorable option since the EPS is higher than in a dilutive merger. The acquirer should also calculate the goodwill resulting from the merger by deducting the identifiable assets from the purchase price. The goal of the yellow knight company is to demonstrate to the investors how the new relationship will grow the business and the expected gains from the merger.



The acquirer should also consider the value to be generated after the merger of the two businesses. The acquiring company should analyze and evaluate the possibility of a high cash flow from the merger, lower cost of capital, and long-term growth of both companies. The merger should result in an increased growth rate in productivity, sales, and customer acquisition. The cooperation should provide a greater impact than the productivity of each company separately in various areas such as in finance, operations, market power, employees and tax incentives.


Asset Sale and Stock Sale

Another factor to be considered is the asset sale and stock sale. An asset sale refers to the purchase of the target’s assets and liabilities while stock sale refers to the purchase of the target’s stocks. Both parties benefit from opposing structures such that buyers prefer asset sales while the seller prefers stock sales. The tax on the sale of an asset is beneficial to the acquiring company since there is a reduction of tax carried forward. Asset value depreciates with time, and the cost incurred during merger by the yellow knight firm is lower than in a stock sale.


Types of Mergers

Depending on the terms agreed upon by the two organizations, merging can be done in several ways. They include market extension merger, horizontal merger, conglomerate merger, product extension merger and vertical merger. The type of merger chosen is determined by the purpose of the business transaction, economic function, and relationship between the merging companies.

Market extension merger is the type of merger that occurs between two companies dealing in the same products but are in different markets. The merger aims to expand the market base and create diversity.

On the other hand, a horizontal merger is the incorporation of two firms dealing in similar products and operates in the same market. High competition between the two firms leads to this kind of incorporation resulting in a new, larger company with a higher market share and reduced competition in the marketplace.

A conglomerate merger occurs between two firms dealing in unrelated business activities. These two companies lack any similarity, and they merge to extend the market and product extensions.

A product extension merger occurs between two organizations dealing in similar products, but they are not competitors. In effect, a broader customer base is achieved, increasing overall returns.

A vertical merger is an integration between the acquiring company which relies on the products and services produced by the other firm. It is the relationship between a manufacturing company with a supply company, increasing the efficiency of the supply chain which, in turn, increase returns for the yellow knight company.


Benefits of a Merger

One of the benefits of a merger is the potential for an immediate growth without the need to start a business from scratch. A good foundation for cutting capital cost and increasing the rate of growth and returns is established. A company may seek to merge with another company for the following reasons: to better customer service, improve the profitability, achieve the desired size of the business, expand the field of activities, abrupt growth, and acquisition of assets at a lower cost.

Merging two companies provides access to more customers than they would as individual companies. Where both companies were previously successful in both markets, the new company benefits from a large customer base and more resources to offer better services. For example, the merger of German car manufacturer Daimler Benz and American car manufacturer Chrysler Corporation gave Daimler Benz access to both the US and European markets.


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