This change in plans is mostly because they are likely to fail in the acquisition. Hence, they result to friendlier approaches and bid for a merger instead. The colour “yellow” is used because it is associated with weakness and cowardice.
An example of a yellow knight
Bora’s Pharmaceuticals wants to acquire Quin’s store through a hostile takeover but they encounter some challenges which predict that they are less likely to succeed. If instead of the planned acquisition they take a different approach and propose a merger instead, then Bora’s Pharmaceuticals is referred to as a yellow knight.
How does a company become a yellow knight?
A company becomes a yellow knight when they back out of a hostile takeover. Some reasons for that include;
1. The cost of acquisition is higher than the proposed budget.
2. The circumstances surrounding the target company have changed.
3. There is a stronger opposition in the market.
4. The target company stands its ground and put forth a resistance.
5 The yellow knight has weak bargaining power.
Other types of knights
1. Black Knight: A black knight is a company that plans a hostile takeover of another company and follows through with it without backing out.
2. Grey Knight: A grey knight is a company that is a second hostile bidder after the black knight in a takeover attempt.
3. White Knight: A white knight is also a bidder in the takeover attempt but it’s preferred by the target company.
Key point
A yellow knight is a company that attempts to take over another company but backs out to propose a merger instead.
A company is only a yellow knight when it transitions from a hostile takeover plan to a merger plan because it is unable to acquire the target company.
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