Question

Describe how the takeover defenses "white knight" strategy versus and "poison pill" are used by management.

Answer 1

White Knight Strategy: A white knight refers to an investor who protects a firm from an attempted hostile takeover by acquiring the firm. In business, the target firm seeks out white knight investors for a friendly takeover.

Hostile takeovers are generally attempted by businesses or individuals who acquire shares in an open market or make unsolicited proposals for acquisition (or proxy votes) to gain control of the firm's management. In such a situation, the board of a target firm may invite a friendly investor to acquire the firm under reasonable conditions, thus warding off the hostile attempt and thwarting a takeover bid by an unfriendly firm. The friendly acquisition is an acceptable alternative because the management is generally not replaced by the new board. White knights make acquisitions on friendly terms.

Poison Pill Strategy: A poison pill is a strategy that tries to create a shield against a takeover bid by another company by triggering a new, prohibitive cost that must be paid after the takeover. Poison pills raise the cost of mergers and acquisitions.  At times, they create enough of a disincentive to deter takeover attempts altogether. It is a structural maneuver designed to thwart attempted takeovers, where the target company seeks to make itself less desirable to potential acquirers.

e.g: In 2012 Netflix adopted a Poison Pill (shareholder rights plan) to fend off Karl Icahn from a hostile takeover. Upon learning that Icahn acquired a 10% stake in the company, Netflix immediately put on the defensive by swallowing a poison pill.