What Is a Yellow Knight?

A yellow knight is a company that was orchestrating a hostile takeover attempt, but then backs out of it and proposes a merger of equals with the target company instead.

Understanding a Yellow Knight

Various colored knights are used to identify the nature of a takeover or potential takeover: The process where a company tables an offer to assume control of or acquire another. Yellow knights are the ones that start out aggressively, seeking to purchase a company against its management’s wishes, and then experience a change of heart, back down and propose joining forces in a merger instead.

Yellow knights are a case of if you can’t beat them, join them. They might have any number of reasons for backing out of the takeover attempt. Often, they simply realize that the target company is going to cost more and/or has better takeover defenses than they thought, and that they need to change strategy.

A stern rejection might leave the yellow predator in a weak bargaining position, and lead it to conclude that a friendly merger is the only reasonable option it has left on the table to get hold of the target’s assets. In a complete U-turn, the yellow knight goes from attempting to bully the target into submission and swallow it up to proposing that they team up together as an equal force.

Why are these types of companies called yellow knights? Because yellow is a color associated, among other things, with cowardice and deceit. 

Other Types of Knights

In mergers and acquisitions (M&A), the buying company may be described as a knight of any one of four different colors. Other than yellow knights, there are:

Black Knights

Black knights make unwelcome, hostile takeover bids and, unlike yellow knights, stand their ground. These types of predators are the source of nightmares for target company management as they bully their way into power and usually have goals that deviate from what the current bosses are trying to achieve.

White Knights

The opposite of black knights, white knights are the friendly forces tasked with rescuing the target from the clutches of another prospective buyer with intentions to bleed it dry to make a quick profit.

Often, company officials will seek out a white knight to preserve its core business or to negotiate better takeover terms. The white knight might agree to play this role in exchange for some incentives, such as paying a smaller premium to take control than otherwise would be required under competitive bid conditions.

Grey Knights

Grey knights, as their color suggests, sit somewhere between white and black knights. Though not as desirable as the former, they are at least viewed as a more appealing option than the latter.

Gray knights capitalize on the fact that they are perceived as a friendlier alternative to a hostile black knight and use that as a negotiating chip to get a more favorable deal when a persistent, unwanted predator comes calling.