What Is a Yellow Knight?
Let me tell you directly: a yellow knight is a company that was pushing for a hostile takeover but then pulls back and suggests a merger of equals with the target company instead.
Key Takeaways
You need to know that a yellow knight is essentially a company that starts with a hostile takeover bid but retreats and proposes a merger with the target. This shift often happens when they discover the target will cost more or has stronger defenses than expected. In that scenario, the yellow knight ends up in a weak spot, forcing them to either walk away or offer a friendly merger as the next best move.
Understanding a Yellow Knight
In the world of takeovers, we use different colored knights to describe the type of approach a company takes when trying to acquire another. A yellow knight begins aggressively, aiming to buy a company against its management's wishes, but then has a change of heart, backs off, and suggests merging as partners instead.
It's like the saying goes: if you can't beat them, join them. There could be various reasons for this retreat. Often, it's because they realize the target is going to be more expensive or has better defenses than they anticipated, so they have to switch tactics.
A firm rejection can put the yellow knight in a poor negotiating position, leading them to see a friendly merger as the only viable way to access the target's assets. This is a total reversal—from trying to force the target into submission to proposing they team up as equals.
Why call them yellow knights? Because yellow is linked to cowardice and deceit, among other things.
Important Note
Keep in mind that the term yellow knight is derogatory—it suggests the hostile bidder lost their nerve, chickened out of the takeover, and ended up bargaining from weakness.
Other Types of Knights
In mergers and acquisitions, the acquiring company can be labeled as one of four knight colors. Besides yellow knights, here are the others:
Black Knights
- Black knights launch unwelcome, hostile takeover bids and don't back down, unlike yellow knights. They're the nightmare for target management, pushing their way in with goals that often clash with the current leadership's vision.
White Knights
- White knights are the opposites of black knights—they're the friendly rescuers who save the target from a buyer intent on stripping it for quick profits. Company leaders might seek out a white knight to protect the core business or get better terms. In return, the white knight could get incentives like a lower premium for control than in a competitive bid.
Grey Knights
- Grey knights fall between white and black knights in appeal. They're not as ideal as white knights but better than black ones. They exploit their position as a friendlier option to a hostile black knight, using it to negotiate a better deal when an unwanted bidder persists.
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