Black Knight (Finance)

A black knight in corporate finance is a company that offers or conducts a hostile takeover of the target company. Target company management also doesn’t want to sell to a black knight corporation because they usually have sinister objectives. A hostile takeover is a corporation or raider’s acquisition attempt that the target company refuses. As a result, in an effort to seize control, black knight firms seek to circumvent a company’s board of directors.

For example, Company A will be traded on an open market organization that needs to venture into another market where Company B is as of now settled. Organization A methodologies Company B with a purchase offer to its Board of Directors (BoD). Afterthought, Company B declines the offer, closing it isn’t to their greatest advantage. In the event that Company A returns with a takeover endeavor in the wake of being dismissed by Company B’s top managerial staff, that is considered a hostile takeover and Company A would be alluded to as a black knight.

(Example of Black Knight)

Black knights are also willing to create a fast profit and target businesses with issues that they think can be easily solved to make it more valuable. There are many factors that can influence a business to want another business to take over. Metaphorically speaking, to describe the essence of a takeover, differently-colored knights are used. A takeover is the cycle wherein one organization tables a proposal to accept control of or get another organization. The idea of black knights, explicitly, is unwanted and unfriendly. Eventually, it comes down to the drawn-out vital objective of the acquirer. The following are the most well-known reasons why organizations are obtained:

  • Enhancing business abilities: Taking over a business will boost productivity, increase the efficacy of goods and services for marketing, and increase turnover and sales.
  • Acquiring a larger market share: A greater market share is always difficult to achieve. One way to gain a significantly greater market share and decreased competition are to take over a rival business.
  • Product and service diversification: Taking over another corporation allows for diversification of goods and services and, therefore, theoretically increased profitability.
  • Reducing business operational costs: If similar goods are manufactured by combining firms, production efficiency may be used to decrease production and management costs.
  • Replacing the management team: On the off chance that the acquirer accepts the objective organization is ineffectively run, the organization can procure the objective organization and supplant the supervisory crew, with the objective of making the gained organization more beneficial.

In general, a black knight does not want to take over the management of a corporation because its objectives are typically not compatible with what they are trying to accomplish. A tender offer is an offer to buy shares at a premium to the market price from the shareholders of the target company. The takeover corporation immediately executes a tender offer to shareholders, thereby bypassing the consent of the board of directors. A tender offer is an offer to purchase stocks from the shareholders of the target organization at a top rate to the market rate. The takeover business enterprise executes a smooth offer without delay to shareholders, for this reason bypassing the board of directors’ consent.

A proxy fight is a point at which the acquirer convinces existing investors of the objective organization to remove the directorate. This makes the organization simpler to dominate, as the substitution board individuals are required to be more open to a control change. Black knights intend to tie down a large enough controlling interest to impact the objective’s top managerial staff and put the public focus on the board to apply the progressions they need. Because most of the businesses they seek are underperforming, black knights also succeed in drumming up support from other investors, raising their leverage, and the likelihood that their demands will be met.

A white knight is an agreeable potential acquirer that means in and executes an amicable takeover of the objective so as to keep a black knight from finishing a threatening takeover. Black knights commonly need prompt outcomes. All in all, they typically won’t burn through any time applying enormous dubious changes to help benefits, share costs, and line their own pockets. A white knight is called the rescuer of the target company since the white knight is not seeking the target company’s operational control, only possession. Company officials will also pursue a white knight to protect their core business or secure better terms of the acquisition. In exchange for certain benefits, companies can be able to play the savior or white knight.

 

Information Sources:

  1. corporatefinanceinstitute.com
  2. investopedia.com