A gray knight is an uninvited bidder in a corporate acquisition who is not considered a friend or foe of the target company. They are an equitable alternative if the preferred bidder cannot reach an agreement, but may also be a potentially malevolent force waiting for the deal to collapse. Their strategy involves placing a slightly higher offer than the white knight to position themselves as the next logical choice if negotiations break down.
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 a friend or foe of the company receiving the bids. This is in contrast to the white knight, who is the bidder the target company would prefer to work with, and the black knight, who represents a business wishing to stage a hostile takeover.
There is some difference of opinion on exactly what role the gray knight plays in takeover bids. In general, this bidder is not considered a threat to the target company, as the black knight is. While there is agreement that the gray knight is primarily interested in the company for his own purposes, the target company usually has reason to believe that the acquisition would not mean dissolution of the business or some other negative consequence for the company. In this sense, a bidder that is considered gray is considered an equitable alternative if the preferred or white bidder cannot reach an agreement with the target company.
Other views on the role of the gray knight tend to emphasize that the bidder is primarily focused on what can be gained from 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 pet deal to collapse. At that point, the lowest-preferred bidder moves in quickly to complete the acquisition, often at a lower cost than the original offer.
The basic strategy of the gray knight involves placing an offer that is slightly higher than the offer made by the white knight. This effectively positions the gray bidder to be the next logical choice if something hurts the negotiations between the target company and the preferred bidder. If the white knight decides not to pursue the takeover, the gray knight can either let the original offer stand, or counter with a lower offer that would still block any takeover attempt by the black knight. The exact strategy employed will largely depend on both the details of the circumstances surrounding the acquisition action and any laws or regulations that may govern the business acquisition process in the country where the target company is located.
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