Yellow Knight

The predatory corporation that was contemplating a hostile takeover bid is a yellow knight, but backs out of it and recommends a merger of equals with the target company instead. If the targeted company opposes the hostile takeover, the shift in approach will occur and the acquirer is forced to be friendlier in order to negotiate a deal effectively. Yellow knights have different purposes behind retreating from the takeover endeavor, yet habitually are owing to the objective organization’s capacity to battle off a takeover. The reference to the shading yellow demonstrates dread or weakness. The word compares with a white knight, which is a third party that comes along and gives the targeted company much more than the aggressive bidder to acquire the takeover target.

The “yellow” can refer to the color’s association with cowardice in “yellow knight”. A yellow knight is a hostile bidder, resisted by the targeted company. When it becomes more and more unlikely that it will succeed, the bidder switches strategy and instead suggests a merger of equals. Since a yellow knight throws in the towel from a takeover endeavor and withdraws to consolidation conversations, a yellow knight might be seen as frail. There are a few reasons why an organization may change strategies from an antagonistic takeover to a cordial consolidation or securing.

(Example of Yellow Knight)

For a variety of reasons, a hostile bidder might get cold feet or change strategy, but mostly because it believes that a friendlier approach would produce a more favorable outcome. The key explanation is typically only the possibility that the takeover attempt would be unsuccessful. The resistance of the target organization may be high enough to quickly persuade the prospective acquirer that it probably does not have enough resources to complete the acquisition, nor can it access them.

The term (yellow knight) itself is harsh, as it infers that the antagonistic bidder experienced some sudden nerves and backed down of the takeover endeavor leaving them in a feeble bartering position. A yellow knight’s administration may conclude that an unfriendly takeover would be too costly or in any case troublesome yet accepts that the objective organization would be worthwhile. Various colored knights are used in mergers and acquisitions (M&A) to describe the essence of a takeover or possible takeover. There are four kinds of knights in the field of mergers and acquisitions (M&A):

  • Black Knight: It is a hostile bidder that does not alter its approach or policy. It does not seek to become its ‘friend’ unexpectedly, like an eagle that swoops down to capture its prey.
  • Gray (British: Grey) Knight: In a corporate takeover effort, it is the second aggressive bidder.
  • White Knight: It is a third company favored by the targeted company that joins the bid for the targeted company.
  • Yellow Knight: It is an unfriendly bidder that alters its plan and suggests a more agreeable merger of equals.

Once the acquirer drops the hostile takeover bid and agrees to merge with the target company, it is important to weigh many factors to ensure that the new partnership is advantageous. Although takeovers, whether friendly or hostile, can eventually be profitable, a cooperative merger can also give both parties the greatest benefit. The transformation from the aggressive acquirer to the yellow knight, therefore, is also an indication of good fortune.

 

Information Sources:

  1. marketbusinessnews.com
  2. corporatefinanceinstitute.com
  3. investopedia.com