In Finance, what is a Gray Knight?

Sometimes known as a grey knight, a gray knight is an entity that enters the bidding process for a corporate takeover, without being invited to do so. In most situations, this type of bidder is not considered to be friend or foe to the company that is receiving the bids. This is in contrast to the white knight, which is the bidder that the target firm would prefer to work with, and the black knight, who represents a business that wishes to stage a hostile takeover.

There is some difference of opinion on exactly what role the gray knight plays in takeover bids. Generally, this bidder is not seen as being a threat to the target firm, as is the black knight. While there is agreement that the gray knight is primarily interested in the firm for its own purposes, the target firm normally has reason to believe that the acquisition would not mean the dissolution of the business, or some other negative consequences for the firm. In this sense, a bidder who is considered gray is seen as an equitable alternative if the preferred or white bidder is not able to reach an agreement with the target firm.

Other opinions of the role of the gray knight tend to emphasize that the bidder is primarily focused on what can be gained with 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 favored deal to collapse. At that point, the less preferable bidder moves in quickly to complete the takeover, often at a cost that is less than the original bid.

The basic strategy of the gray knight involves extending a bid that is slightly higher than the bid placed by the white knight. This effectively positions the gray bidder to be the next logical choice if anything happens to damage the negotiations between the target firm and the preferred bidder. Should the white knight choose to not pursue the takeover, the gray knight may let the original bid stand, or counter with a lower bid that would still block any takeover attempts by the black knight. The exact strategy employed will depend a great deal on both the specifics of the circumstances surrounding the takeover action, and any laws or regulations that may govern the process of business acquisitions in the nation where the target company is located.