What is a White Knight Defense?

A white knight defense is a type of defense strategy that a target company uses to prevent a hostile takeover.

A white knight is a third-party company or person who prevents a hostile takeover from a party with bad intentions (the “black knight”) by offering better acquisition terms to the target company.

A white squire defense is an offshoot of the white knight defense that allows the target company to stay independent. Instead of outright acquiring the target company, the white squire buys enough shares to stop a hostile takeover. When the takeover attempt fails, the white squire will usually sell their shares back and allow the target company to operate independently.

Unlike a white squire, a white knight defense is still technically a type of hostile takeover. A white knight will take over the target company, which means it’s no longer independent. While it isn’t ideal, a white knight defense is usually much better for the target company than a typical hostile takeover because it will be able to take advantage of better terms from a less nefarious party.

How a white knight defense works

Hostile takeovers by unfriendly outsiders and competitors can destroy a business. Whether through acquiring a controlling share of stock or outvoting a target company’s board of directors, a hostile takeover holds a company hostage to outside control.

In the case of the white knight defense, the aggressor is called a “black knight.” A white knight steps in to “save the day” when a target company is facing a hostile takeover from a black knight.

Although the target company will still lose its independence, the white knight offers more favorable terms than the black knight.

An example of a white knight defense

Consider the following hypothetical example of a white knight defense in action:

Acme Brick wants to buy ABC Brick Company. Acme tries to buy ABC, but ABC turns down its offer.

Instead of taking no for an answer, Acme tries a black knight takeover. It starts buying ABC’s shares so it can gain a controlling interest in the business.

A third company, Jay’s Bricks, notices the hostile takeover happening. Jay’s Bricks offers to buy ABC with better terms, promising to keep its management team in place.

While it still means selling the company, ABC Brick Company accepts the offer from Jay’s Bricks because it’s more favorable than an outright takeover from Acme.

The benefits of a white knight

A white knight defense still allows for a hostile takeover to happen. So what are the benefits of this defense strategy?

While a white knight defense isn’t ideal for a target company, it’s the lesser of two evils. A white knight will usually give the target company more favorable terms, such as:

  • Keeping the leadership team intact
  • Not selling off core business units
  • Continuing the production of certain products
  • Continuing manufacturing operations at a particular factory

Examples of a white knight defense

A white knight defense is one of many strategies a target company can use to avoid a typical hostile takeover. However, it’s aggressive and expensive, so it doesn’t happen very often.

Some of the most famous white knight defenses include:

  • ABC — ABC was about to go bankrupt, so Paramount purchased the business in 1953.
  • Schering — Merck KGaA went after Schering, and Bayer acted as a white knight to prevent the takeover in 2006.
  • AOL — In one of the biggest white knight acquisitions in history, Time Warner acquired AOL in 2000 for a whopping $162B.

A white knight defense usually occurs with large, high-profile companies with assets. It’s unusual to see a white knight defense because target companies will try other options, like a Pac-Man defense, before giving in to an acquisition.