You may have seen TV shows and movies where corporate moguls manipulate the fortunes of large companies in a larger-than-life poker game. In some instances, rescue for a beleaguered company comes in the form of a corporate white knight who proposes a friendly takeover of the company. However, corporate white knights do not have purely altruistic motives -- they act because they see the potential for profit.
White Knight, Gray Knight, Black Knight
A company that has been targeted for a hostile takeover may seek out a white knight. A white knight makes a counteroffer to stockholders of a target company as an alternative to the unwelcome takeover bid of a hostile bidder. When the motives of the would-be corporate white knight are unclear, or the white knight has not gained the full trust of the board of directors of the target company, the bidder is known as a gray knight. A black knight is a former white knight who has developed irreconcilable disputes with the board of directors of the target company, and which forms its own hostile takeover bid for the company.
Takeover Versus Merger
Many people confuse the terms merger and takeover. A merger is generally the result of a mutual agreement between companies, with terms negotiated between the boards of directors for each company, along with requiring a majority vote among stockholders. Although a takeover may be negotiated as well, many corporate takeovers are hostile. A hostile takeover takes place over the objections of the board of directors of the target company. One means of accomplishing a takeover is through a tender offer -- a buyout offer made directly to stockholders. Tender offers often entice stockholders to sell by featuring per-share prices much higher than the stock normally trades on the open market.
Hostile Takeovers and Poison Pills
When a target company fails to attract a white knight, the company’s officers may enact "poison pills" in an attempt to protect the company from a hostile takeover bid. Poison pills are designed to prevent a hostile bidder from acquiring a majority percentage of the target company's stock, thereby preventing the takeover. A poison pill may allow certain stockholders to purchase company stock at prices far below the market trading price. Another form of poison pill is for designated stockholders to sell their stock back to the target company at an attractive premium.
Chrysler, Fiat and Dart
In 2009, at the height of the Great Recession in the United States, Italian car maker Fiat stepped up as the corporate white knight for the struggling American Chrysler Group. After its disastrous merger with German car maker Daimler ended in 2007, the company was sold to American private equity firm Cerberus Capital Management. Fiat’s white knight corporate takeover of Chrysler prevented the breakup of the company. Eventually gaining a 53.3 percent stockholder stake in Chrysler, Fiat has used its controlling interest to revitalize the company. The first offering to result from the takeover is the reintroduction of the Dodge Dart, which has been well received in the auto sector. In fact, Kelley Blue named the 2013 Dart one of the top 10 cars on display at the 2012 Detroit Auto Show.