An Empirical Examination of White Knight Corporate Takeovers: Synergy and Overbidding

Abstract

This study investigates corporate takeovers by knights, a friendly bidding firm actively sought by a target firm in order to avoid being taken over by a hostile bidding firm. White knights are particularly vulnerable to for their targets, i.e., bidding more than the aggregate market value of the target's common stock, since they are, by definition, involved in a competitive bidding contest. Since previous studies have shown: (i) that acquisitions do not, on average, confer substantial benefits on bidding firm shareholders, and (ii) that shareholders of bidding firms entering a merger competition subsequent to the first bidder suffer significant losses in stock value, the white knight's motivation for attempting to outbid its hostile rival is not well-understood. One of the hypotheses investigated in this study, that white knights systematically overbid for their targets, presumes that becoming a white knight does not serve the interests of the bidder's shareholders. Rather, the beneficiaries of a white knight acquisition would be target shareholders, who receive a higher price for their shares, and target managers, who would risk losing their jobs if the firm was taken over by a hostile bidder. Overbidding leads to a wealth transfer from shareholders of the white knight to target shareholders. Under the overbidding hypothesis, white knight acquisitions are expected to generate greater share price losses to bidding firm shareholders and greater share price gains to target shareholders than non-white-knight acquisitions.