What Is a Black Knight?

A black knight is a company that makes an unwelcome, hostile takeover bid. Management of the target company often doesn’t want to sell to a black knight company because they typically have sinister goals. As a result, black knight companies attempt to bypass the board of directors of a company in an effort to gain control.

Key Takeaways

  • A black knight is a company that makes an unwelcome, hostile takeover bid.
  • Companies don’t want to be taken over by black knights, usually because their goals are destructive and don’t align with what management is trying to achieve.
  • Rather than give up, the black knight will seek out ways to conquer anyway, such as by initiating a tender offer directly to shareholders or engaging in a proxy fight.
  • Black knights are often keen to generate a quick profit and target companies experiencing problems that they believe can be easily fixed to make it more valuable.

Understanding a Black Knight

Metaphorically speaking, differently-colored knights are used to identify the nature of a takeover. A takeover is the process wherein one company tables an offer to assume control of or acquire another company. The nature of black knights, specifically, is unwelcome and hostile.

In general, the management of a company doesn't want to be taken over by a black knight because their goals don’t usually align with what they are trying to achieve. However, a black knight company conduct a takeover bid regardless, such as by initiating a tender offer directly to shareholders, engaging in a proxy fight, or attempting to buy the necessary company stock in the open market. 

Black knights aim to secure a big enough controlling interest to influence the target’s board of directors and put public pressure on management to exert the changes they want. Because most of the companies they pursue are underperforming, black knights regularly succeed in drumming up support from other shareholders, increasing their sway, and the possibility that their demands will be met.

These characters generally target companies that are struggling and trading below their intrinsic values. Similar to raiders, their principal aim is to make a quick buck, rather than unlock long-term value.

Criticism of Black Knights

Black knights typically want immediate results. In general, they usually won’t waste any time applying big controversial changes to boost profits, share prices, and line their own pockets.

Common tactics include aggressive job cuts, asset stripping, and positioning the company for a sale or merger. Another popular approach is introducing debt-funded share repurchase programs.

Some of the measures these predators adopt may actually help the company to get into better shape. Others could perhaps destroy it. Black knights often care little about the long-term impact of their decisions and the financial welfare of shareholders that plan to stick around. All that matters is that they make money and crystalize gains before the target they butchered and plundered potentially crashes and burns.

Important

Like raiders, black knights tend to target companies that are mismanaged, have excessive costs, could be run more profitably as a private company, or experience other problems that can be fixed to make it more valuable.



Black Knight vs. White Knight 

White knights are the opposite of black knights. They are the ones tasked with potentially rescuing the target from the clutches of another prospective buyer with intentions to bleed it dry to make a quick profit.

Often, company officials will seek out a white knight to preserve its core business or to negotiate better takeover terms. Companies may be willing to play the savior, or white knight, in exchange for some incentives (such as paying a smaller premium to take control than otherwise would be required under competitive bid conditions).

Types of Knights

Grey Knight

grey knight is another potential takeover candidate. Though not as desirable as a white knight, they are more appealing than black ones.

Gray knights take advantage of the fact that the target company sees them as a friendlier alternative to a hostile black knight; they will often use that status as a negotiating chip to get a more favorable deal when a persistent unwanted predator comes calling.

Yellow Knight

Finally, there’s also a yellow knight. After initially planning a hostile takeover attempt, these companies then back out in favor of proposing a merger of equals.