What is a Gray Knight?

A gray knight refers to a potential acquirer in a public merger or acquisition that takes advantage of a hostile takeover to assume control of the company. The possible buyer is also known as a secondary or separate party in a takeover to the first bidder and the target company. This potential buyer may either offer a better alternative to the entity trying a hostile takeover or outbid the first bidder to take control of the company.

What does a Gray Knight do in a Merger or Acquisition?

What usually happens is that the gray knights study how the first bidding company and target company interacts to see if there is any possibility of problems arising. If they do, the separate entities get involved by taking advantage of the situation for their own benefit. The gray knight, most of the time, falls between the two parties: the knight white that works with the management and board of directors to reach a reasonable purchase deal and hostile firm pursuing a hostile takeover. 

Generally, we can compare gray knights to circling vultures who wait for merger deals to fail or get into problems. That way, they create a favorable negotiating position for the gray knights. The gray knights may bid out the first bidding company that is trying a hostile takeover. Another move they are likely to make in such a situation is to come up with a poor offer. 

Note that according to the target company, the first bidder is not friendly and so gray knights come in as a better alternative for the company by removing the first bidder out of the picture. Gray knights, in most cases, do not show their real intentions when making these moves. All they do is to present themselves as the best option for the target company, and this way, it becomes possible for them to take control of the company by purchasing it at a low price.

What does the Gray Knight Do? 

When it comes to the sale of a privately-held middle business, certain potential buyers prefer watching to see how the negotiation process unfolds before they can make their offer. Note that in such business deals, most of them do not push through to the end. So, the gray knights take advantage of such a situation and approach the target firm, with a poor price purchase offer. Remember, the company in question is desperate after coming out of unsuccessful business transactions. So, the gray knights believe that it is easy to strike a deal when the firm is in that situation.

Related Concepts

• Hostile Takeover
• Power Struggles in Corporate Governance
• Tender Offer
• Proxy Contest
• White Knight and Pac Man Defenses
• Incentivizing Acquirer Defense
• Asset and Liability Defenses
• Shark Repellant Defense
• Poison Pill Defense
• Macaroni Defense
• Kamikaze Defense
• Jonestown Defense