Gray Knight

Gray Knight

Investopedia / Sydney Saporito

What Is a Gray Knight?

During a public corporate takeover or acquisition, a gray knight is a secondary, separate party to the first bidder and target company. The gray knight is a party that makes a higher offer than a white knight in a takeover attempt.

Gray knights generally make offers that are unsolicited after a takeover bid is made by a white knight. A white knight is a hostile takeover defense whereby a friendly individual or company acquires a corporation at fair consideration when it is on the verge of being taken over by an unfriendly bidder or acquirer. The unfriendly bidder is generally known as the black knight.

Although a gray knight may make an offer purely for its own financial gain, it tends to be much friendlier than hostile takeover attempts backed by black knights.

Key Takeaways

  • A gray knight is a party that outbids a white knight in a takeover bid.
  • Offers made by gray knights are often unsolicited.
  • Although purely motivated by their own financial gain, gray knights are generally considered much friendlier than hostile black knights.
  • Gray knights are seen as circling vultures because they wait for deals to fall through before swooping in to negotiate.

Understanding Gray Knights

Takeovers are a big part of the corporate world. Larger companies often buy out smaller ones in order to expand their market, acquire new properties or technologies, get into a foreign country, or eliminate the competition—all for their own financial gain.

Smaller companies that want to be acquired normally put out a call for solicited offers. This means they welcome offers from other corporations. These takeovers are normally friendly: The target firm comes to the negotiating table with potential acquirers to work out their deals.

Smaller companies that don't want to be taken over become subject to hostile takeovers by entities that make unsolicited bids. These companies try to seize control of the target without getting approval from its board of directors. They may do this by buying shares in the target on the open market, trying to force a proxy fight, or issuing a tender offer.

Acquiring companies can take on different forms and, therefore, have different names. Unsolicited takeover attempts are normally led by hostile parties known as black knights. A company may consider an offer by another party called a white knight. By doing so, the target may accept the unsolicited offer by a white knight in order to prevent being taken over by a black knight. But there's yet another knight that may also come to the table to put in a bid.

Waiting for a deal to fail gives gray knights an advantage because they approach target firms with less-favorable offers.

Gray knights wait for merger deals to get into problems or fail before they cross the finish line. By doing so, they create a situation that puts the gray knight in a good negotiating position with the potential target. They may outbid a white knight or make a less-favorable offer, taking advantage of the fact that the target company sees them as a friendlier alternative to a hostile black knight. But a gray knight may not always reveal its true intentions, which are often only motivated by its own financial needs.

Gray Knight vs. White Knight vs. Black Knight vs. Yellow Knight

A gray knight may enter a hostile takeover attempt after black and white knights have already put in their offers. As mentioned above, a black knight is a party that initiates a hostile takeover bid by trying to take control of the target company. The target may try to initiate a line of defense such as a poison pill, golden parachute, or golden handshake in order to prevent the black knight from completing the acquisition.

A white knight is involved in hostile takeovers but is generally seen as a friendlier party than a black knight. Although they may not want to be taken over, target companies may work with white knights to keep black knights at bay. A white knight may work with its target to keep its core business together or to work out more amenable takeover terms between the two firms.

A yellow knight, on the other hand, is an entity that was part of a hostile takeover deal but decided to back out for any number of reasons. For the most part, a yellow knight abandons its takeover plans because of the cost associated with the deal. Instead, it may decide to propose something else like a merger with the target on an equal level. Therefore, a yellow knight is essentially a hostile party that became friendly.