White Knight M&A Hostile Takeover Strategy

When it comes to hostile takeovers, the first defence strategy often sought is a white knight - a friendly buyer who offers fair consideration.
 

What is a white knight?

A “white knight” is a company or investor who provides a hostile takeover defence for a target company, preventing an unwanted acquisition attempt by purchasing the target company. This friendly takeover is preferable to hostile acquisition.

The white knight defence is just one strategy to block a hostile takeover. Benefits of the white knight takeover include terms and conditions of acquisition that are acceptable to the board, shareholders and management and the ability to keep the core business of the target company intact. 

The terminology ‘white knight’ comes from the game of chess, where the white knight is considered a saviour and the black knight is an adversary. 
 

How the white knight strategy works

Once a company becomes aware that a hostile takeover is in progress, the board may seek options to maintain control of the company. A hostile takeover is where the acquiring company proceeds to buy shares in the target without the board’s cooperation or consent. 

The target company may seek external advice or rely on its board to find strategies to prevent hostile acquisition. Finding a friendly buyer in the form of a ‘white knight’ is just one strategy that may be available. Other defences, such as poison pill, golden parachute, staggered board and employee stock ownership, require foresight to establish. 

Once a potential friendly buyer is identified, the white knight makes an offer to purchase the target company with more favourable terms than the hostile would-be acquirer.  The deal is agreed on both sides and once complete the white knight controls the target company. The friendly buyer may choose to keep the board and management of the company or replace either or both. 

More: The M&A Process

Example: White knight Activis rescues Allergan from Valeant Pharmaceuticals takeover

Faced with a hostile takeover by hedge fund Perishing Square Capital Management and Valeant Pharmaceuticals, Allergan, a healthcare company and maker of Botox, sought support from Goldman Sachs and Bank of America Merrill Lynch along with legal advice. 

The white knight and Irish-based Actavis acquired Allergan in a $66 billion cash and stock deal in 2015, taking the Allergan name in markets outside North America. 

Actavis would benefit from the deal with cost savings, improved marketing success and expanded reach into key markets in Asia and Latin America, becoming one of the largest pharmaceutical companies in the world across ophthalmology, neurology, urology as well as dermatology and aesthetics. 

Legal action against Valient and Perishing Square Captial Management resulted in findings of insider trading and hefty settlement payouts.

Successful hostile takeovers are rare

Large companies tend to integrate built-in defences against a hostile takeover, making it especially difficult to undertake a hostile acquisition. Taking a disciplined approach to M&A, pursuing organic growth and creating transparent and accessible corporate governance policies protect organisations from hostile takeover and provide defences against unfavourable buy offers. 

For example, Perrigo Company was able to reject an inadequate offer from Mylan in 2015, with the CEO stating that the board was in a position to reject the offer, which undervalued the company’s durable business model and future growth prospects. 

Deals that begin as a hostile takeover can turn into a mutually agreed merger, as seen in the transaction between oil companies Halliburton and Baker Hughes.

Keep reading: Mergers and Acquisitions (M&A) Examples

Halliburton emerges as yellow knight in Baker Hughes takeover 

Halliburton emerged as a ‘yellow knight’ negotiating a friendly deal with Baker Hughes. Both oil companies are decades old, combining fracking expertise with knowledge of equipment for drilling through rock. However, the deal was blocked by the regulator, with the Department of Justice finding that a merger would unlawfully eliminate significant competition in at least 23 markets crucial to the exploration and production of oil and natural gas in the United States. 

White knight strategy compared to poison pill defence

White knight and poison pill are both defensive strategies that target companies can employ to prevent takeover by a hostile party. A poison pill is where a clause allows the company to buy back outstanding shares to block the hostile acquirer from obtaining a majority shareholding and control of the company. 

Unlike the white knight defence, the poison pill strategy requires a clause in the stockholder rights plan that enables existing shareholders to increase their holdings, often at a discount, diluting the share value in an attempt to curtail a hostile takeover. White knight is the primary defence available to target companies where all other options have been exhausted. A white knight, or friendly buyer, allows the company to negotiate the terms of the deal. 

Next best to a white knight is a so-called ‘grey-knight’. This third potential bidder in a hostile takeover is friendlier than the hostile party (the black knight), yet not as favourable as a white knight. A grey knight pursues its own interests in the deal yet still demonstrates a level of fair negotiation and disclosure throughout the deal. 

Organised deal management puts buyers and sellers on the front foot in hostile takeovers

From ensuring that deals meet all regulatory standards and aren’t blocked after the fact, to confidential disclosures and negotiations, managing due diligence through the deal is key to a successful transaction. 

By keeping information securely in one place, acquiring and target companies can assess quickly and easily who the most interested parties are and which bidders are the best fit. Ansarada are experts in this field, with deal software designed to make processes efficient and help companies assess buyer suitability - key for a successful white knight defence. 

Frequently asked questions

What is a white squire in M&A?

A white squire purchases part of a company to prevent a hostile takeover. The purchase does not amount to a controlling interest, the investor or company buying into the target company just purchases a sufficient interest to block the hostile takeover. 

What is a yellow knight in M&A?

A company that begins a hostile takeover attempt then backs out and proposes a merger with the target company is known as a “yellow knight”. A yellow knight may emerge when the target company has robust takeover defences and/or the hostile takeover will cost more than anticipated. 

What are examples of a white knight strategy?

Examples of white knight M&A include JPMorgan Chase’s acquisition of Bear Stearns during the 2008 GFC, Bayer’s rescue of Schering from a hostile takeover by Merck KGaA and Microsoft’s acquisition of Yahoo! in the face of a hostile takeover attempt by Carl Icahn.