DEFINITION of 'Yellow Knight'

A yellow knight is a company that was planning a hostile takeover attempt, but backs out of it and instead proposes a merger of equals with the target company.

BREAKING DOWN 'Yellow Knight'

Yellow knights are a case of if you can’t beat them, join them. They might have any number of reasons for backing out of the takeover attempt. But often they have simply realized that the target company is going to cost more and/or has better takeover defenses than they thought, and that they need to change strategy.

This might leave the yellow knight in a weak bargaining position, but a friendly merger might still yield results if there is a real financial rationale for the merger. The term itself is derogatory, as it implies that the hostile bidder got cold feet and chickened out of the takeover attempt leaving them in a weak bargaining position.

In mergers and acquisitions (M&A), various colored knights are used to identify the nature of a takeover or potential takeover. A black knight is a company that makes a hostile bid in a takeover attempt. A white knight is a third company that makes a friendly offer to buy the acquisition target. A gray knight is a second unsolicited bidder in a corporate takeover.

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