What it means
The term is part of a small family of takeover nicknames. A white knight is a preferred rescuer, a grey knight is an uninvited third bidder whose intentions are unclear, and a white squire takes a large but non-controlling stake to help the target stay independent.
A black knight normally begins by building a stake quietly up to the disclosure threshold, then either writes directly to the board in a public "bear hug" letter or takes an offer straight to shareholders. Because the board has refused to negotiate, the bidder must win the argument in public and usually pays a larger premium to do so.
The board's position is more constrained than it first appears. Directors owe duties to the company and its shareholders, so refusing a bid because they dislike the buyer is not a defensible reason; they must argue that the price undervalues the business or that the deal carries risks shareholders would not accept.
Defences are correspondingly technical. Shareholder rights plans that dilute a bidder crossing a set stake, staggered board terms that slow a change of control, sale of a prized division, and simply finding a better bidder are the usual tools, though what is permitted varies enormously between jurisdictions.
For shareholders a black knight is often good news, because a hostile approach puts the company in play and frequently ends with a higher price from someone. The auction that follows a rejected bid regularly delivers more than the original offer, whoever eventually wins.
The label itself is loaded and worth treating with care. Hostility describes the board's reaction rather than the merit of the bid, and plenty of unwelcome approaches have proved better for shareholders than the plan they replaced.
In practice
Real-world examples.
Example
A packaging group builds a 9% stake in a smaller rival and writes publicly to its board proposing a merger at a 25% premium. The board refuses to engage, so the bidder takes the offer directly to shareholders and campaigns on the target's weak three-year returns.
Example
A private equity firm makes an unsolicited approach for a listed retailer. The board rejects it as opportunistic given a depressed share price, then runs a formal sale process that attracts two further bidders and ends at a materially higher price.
Example
A target facing a hostile bid agrees to sell its most profitable division to a third party, removing the asset the bidder wanted most. The defence succeeds, but several large shareholders vote against the board at the next annual meeting for blocking a premium they wanted to accept.
Formula
Calculation
Takeover premium = (Offer price per share - Undisturbed share price) / Undisturbed share price. Deal value = Offer price per share x Shares outstanding.
Worked example: a target trades at $40 a share with 20 million shares outstanding, so its undisturbed market value is $800 million. A black knight bids $48 a share in cash.
Premium = ($48 - $40) / $40 = $8 / $40 = 0.20, or 20%
Deal value = $48 x 20 million = $960 million
The board rejects the bid and finds a friendly buyer willing to pay $52 a share.
Premium = ($52 - $40) / $40 = $12 / $40 = 0.30, or 30%
Deal value = $52 x 20 million = $1,040 million
Shareholders receive $4 a share more than the hostile offer, which is $4 x 20 million = $80 million of extra value created by the contest itself.Case study
Seen in the real world.
Peregrine Foods is a fictional listed food producer used purely as an illustrative example, with 50 million shares trading at $12, giving a market value of $600 million. Halgarth Capital, an equally invented buyout firm, quietly built a 9.8% stake and then wrote to the board offering $14.40 a share, a 20% premium valuing Peregrine at $720 million.
The board rejected the approach, arguing that the share price was depressed by a temporary input cost squeeze and that the offer captured none of the recovery. It adopted a shareholder rights plan triggered if any holder passed 15%, which bought time, and then ran a controlled auction rather than simply saying no.
A trade buyer emerged and agreed a recommended offer of $16.20 a share, a 35% premium worth $810 million. Peregrine's shareholders ended up $4.20 a share better off than before Halgarth appeared, or $210 million in total, which is the illustrative point: the black knight lost the auction but created most of the value in it.
Watch out
Common mistakes.
- Assuming a hostile bid is automatically bad for shareholders, when it often triggers an auction that ends at a much higher price.
- Confusing a black knight with a white knight, since the distinction is only whether the target's board welcomed the approach.
- Calculating the premium against the share price after the bid leaked, which understates it badly; the undisturbed price before any speculation is the correct base.
Questions
People also ask.
Can a board simply refuse to sell?
It can recommend rejection, but in most markets shareholders decide whether to accept an offer, and directors who obstruct a good price risk legal and voting consequences.
What is a bear hug?
It is a public letter setting out a generous offer, designed to put pressure on directors by letting shareholders see the price they are being denied.
Are hostile bids common?
They are a small minority of deals, because they cost more, take longer and give the bidder little access to information before committing.
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