White Knight
A white knight is a friendly acquirer that a board brings in to defeat a hostile bid: a company the board would rather be bought by, which offers a higher price, better terms or a more compatible plan than the unwelcome bidder, and receives the board's recommendation and its cooperation in return. It is the defence that ends with the company sold — to someone else.
- Also known as
- White knight bidder, Friendly bidder, Rescue bidder
- Used at
- contested takeovers of listed companies, once a hostile bid is public and the board has decided that independence is not the outcome shareholders will accept
- Binding
- the white knight's offer is a takeover offer like any other, with the board's recommendation; a break fee and matching rights are common in the agreement between them, within the limits takeover rules allow
- Typical outcome
- the hostile bidder raises, walks, or is outbid; shareholders receive more than the hostile offer either way; the white knight pays a premium it might not have paid without the contest
- Typical alternatives
- a "white squire" — a friendly investor taking a blocking stake without buying the company; a defensive acquisition that makes the target too large or too different for the bidder; a recapitalisation that pays shareholders the premium directly
- Parties
- the target's board and advisers, the hostile bidder, the white knight, the shareholders who choose between offers, and the takeover regulator supervising the contest
How a white knight works in practice
A hostile bid is announced and the board recommends rejection: the price undervalues the company, the bidder's plan would dismantle it, the culture does not fit. Rejection alone does not stop the bid — the shareholders decide — so the board's advisers look for a better one. They approach companies that might want the target and have the money: competitors, strategics in adjacent sectors, funds. A white knight that emerges gets what the hostile bidder was refused — diligence, management access, the board's recommendation — and in return offers more, or offers the same with terms the board prefers.
The contest then runs by the takeover rules. The hostile bidder may raise; the white knight may match; the board may grant the white knight a break fee (capped, in the UK, at 1% of the offer value) and a right to match any higher offer. Shareholders, including the arbitrage funds who bought in at the announcement, sell to whoever pays most; the board's recommendation matters at the margin and the price matters everywhere else.
The white knight's risk is overpaying in the heat of a contest for a company it had not planned to buy; the board's risk is that the white knight is simply the bidder it liked better, at a price the shareholders would have got anyway.
Example
A listed payments company at £4.00 rejects a £5.20 hostile tender offer from a larger group. Its advisers approach five parties; a US processor with a European strategy engages, does three weeks of diligence the hostile bidder was denied, and offers £5.80 in an agreed deal with a 1% break fee and a matching right. The hostile bidder, unable to see the books and told by the regulator that its plans for the target's licence will be examined, does not raise. The white knight's offer completes: shareholders receive 45% over the undisturbed price against the 30% the hostile bid offered; the board keeps the company's platform intact under a buyer that wanted it; the white knight pays £90m more than the hostile bidder would have — for a business it had been considering for a year and now owns.
Common mistakes
- Looking for a white knight only after the hostile bid, when the candidates have days rather than months to decide. - A board preferring the white knight for its own reasons — jobs, culture, the chairman's seat — and recommending a lower price than the hostile bidder's. - Break fees and matching rights so generous that the takeover regulator strikes them or the hostile bidder walks and the white knight lowers its offer. - A white knight that overpays in the contest and spends three years explaining it. - Forgetting the white squire: sometimes a friendly minority stake defeats the bid without selling the company at all.