A gray knight is an uninvited bidder in a corporate acquisition, not seen as a threat to the target firm like a black knight. They offer a slightly higher bid than the white knight and can become the next logical choice if negotiations fail.
Sometimes known as a gray knight, a gray knight is an entity that enters the bidding process for a corporate acquisition, without being invited to do so. In most situations, this type of bidder is not considered friend or foe of the company receiving the bids. This is in contrast to the white knight, which is the bidder the target firm would prefer to work with, and the black knight, which represents a firm wishing to stage a hostile takeover.
There is some difference of opinion as to what exactly the role of the gray knight is in the takeover bids. Typically, this bidder is not seen as a threat to the target firm, like the black knight is. While there is agreement that the gray knight is primarily interested in the firm for his own purposes, the target firm normally has reason to believe that the takeover would not mean the dissolution of the business, or other negative consequences for the firm . In this sense, a bidder considered gray is seen as a fair alternative if the preferred or white bidder is unable to reach an agreement with the target firm.
Other views on the Gray Knight’s role tend to emphasize that the bidder is primarily focused on what can be gained through the acquisition, especially if the White Knight backs out of the deal. From this perspective, the Gray Knight is sometimes seen as a potentially malevolent force that is simply waiting for the favored business to finish. At that point, the least preferable bidder moves quickly to complete the acquisition, often at a lower cost than the original offer.
The gray knight’s basic strategy involves extending a slightly higher bid than the white knight. This effectively positions the gray bidder as the next logical choice if something happens that damages negotiations between the target firm and the preferred bidder. If the White Knight chooses not to pursue the takeover, the Gray Knight can either let the original offer stand, or fight back with a lower offer that would still block any takeover attempts by the Black Knight. The exact strategy employed will depend largely on both the specifics of the circumstances surrounding the takeover action and any laws or regulations that may govern the asset acquisition process in the nation in which the target company is located.
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