Motives and Consequences of White Knight Takeovers
| Author | Xing Chen,Saif Ullah |
| Published date | 01 July 2018 |
| Date | 01 July 2018 |
| DOI | http://doi.org/10.1002/jcaf.22342 |
Motives and Consequences
of White Knight Takeovers*
Xing Chen and Saif Ullah
INTRODUCTION
In corporate
finance, a “white
knight”comes to the
aid of a target firm
that is resisting
acquisition by a hos-
tile firm; in doing so,
the white knight pre-
vents an unwelcome
takeover. From a tar-
get firm’s perspective,
some acquirers may
not be ideal because
they want to move
the company in a dif-
ferent direction, or
the targets’manage-
ment of the targets
may feel that they
would be replaced by the hos-
tile bidders after acquisition.
Existing studies do not
investigate the role of corpo-
rate governance in white knight
bidding contests. We do so here
and find that white knights are
more likely to succeed in
acquiring target firms because
they offer higher transaction
value. We report that white
knight contests have signifi-
cantly decreased after the
adoption of the Sarbanes Oxley
(SOX) Act. The role of a white
knight is controversial as an
anti-takeover defense. A very
popular undergraduate text-
book by Ross, Westerfield,
Jaffe, and Roberts (2015)
describes the situation suc-
cinctly, “Target firms some-
times seek a competing bid
form a friendly bidder—a white
knight—who prom-
ises to maintain the
jobs of existing man-
agement and to
refrain from selling
off the target’s
assets”(p. 882).
Specifically,
30 white knight con-
tests took place dur-
ing the 10 years
before the passage of
SOX, and only seven
took place during the
10 years after the pas-
sage of SOX. How-
ever, in logistical
analysis, we do not
find that SOX is a
significant contribu-
tor to the diminishing number
of white knight bids.
Existing research shows
that a white knights’participa-
tion in an acquisition generally
does not confer substantial
benefits to the bidding share-
holders (Banerjee & Owers,
1992; Bradley, Desai, & Kim,
1988). Several studies have
assessed the impact of white
knights’bids on common stock
returns. White knight bidders
may experience negative
Refereed (Double-Blind
Peer Reviewed)
*JEL Classification: G14, G32, G34
Previous studies have shown that shareholders of
acquiring firms experience negative returns
during takeover contests. Our investigation of
white knights confirms these results using both
short-term and long-term abnormal returns
around such contests. Our results suggest that
white knight bidders experience performance
similar to other friendly bidders after making a
bid. However, we find no significant effect of
financial strength and ownership structure on the
likelihood of a white knight takeover attempt.
Instead, we find that having a classified board is
an important determinant in predicting whether a
firm will make a bid as a white knight. We find
that white knight bidders are more likely to
succeed as they offer a higher transaction value
to target firms’shareholders. © 2018 Wiley Periodicals, Inc.
© 2018 Wiley Periodicals, Inc.
Published online in Wiley Online Library (wileyonlinelibrary.com).
DOI 10.1002/jcaf.22342 47
returns on the announcement
of a bid. Existing literature has
postulated many reasons for
it. Namely, the white knight
bidder may be motivated by
reasons (e.g., a personal rela-
tionship with the target firm’s
management) other than value
maximization. Also, the new
combined firm may become a
less attractive target for other
firms, and the bid may be
unplanned and hasty
(Banerjee & Owers, 1992).
These returns may be negative
because of the auction-like
nature of the contest and the
involvement of multiple bidders
(Bradley et al., 1988).
Whereas existing studies
focus on the reaction of the mar-
ket to a single decision, in this
article, we are interested in both
the short-term and the long-term
cumulative effects of a firm’s
decision to make a white knight
bid. Our study is furthermore
different from the existing litera-
ture because we look at the role
of classified boards and other
governance variables in deter-
mining the probability of a firm
becoming a white knight. We
also focus on U.S. firms only
(targets and acquirers) and look
at the long-term performance of
white knight firms. This study
contributes to the current litera-
ture on corporate governance
and the decision-making process
by exploring various elements in
the merger and acquisition
(M&A) process. Firm and deal
characteristics, board character-
istics, and ownership structure
are found to significantly con-
tribute to the abnormal returns
experienced by white knights in
the long run. However, we find
no significant effect of financial
strength and ownership struc-
ture on the likelihood of a white
knight takeover attempt.
Instead, our empirical results
provide evidence that having a
classified board is the only indi-
cator that contributes to becom-
ing a white knight.
Thus the main focus of the
existing debate is that white
knight bidders are a special
type of bidders, and they make
bids for targets based on
motives other than value maxi-
mization. Existing studies attri-
bute the poor performance of
white knight bidders to these
non-value-maximizing motives.
One drawback of these studies
is that they do not compare the
performance of white knight
bidders with that of other
friendly bidders. Specifically, it
is possible that white knight
bidders are just like other
friendly bidders and that they
make their bidding decisions
based on same criteria used by
other friendly bidders. In that
case, we should not find any
significant differences in corpo-
rate governance, deal charac-
teristics, and post-bid
performance variables of white
knights versus those of other
matched friendly bidders.
This article is organized as
follows. Literature Review and
Hypotheses Development
section summarizes the findings
on market returns and the
motivations of the acquirers
and the bidders, as well as sum-
marizes the literature on white
knights. Data section describes
the data, the sample selection,
and the related variable defini-
tions. In Methodology section,
we introduce the methods used
to examine firm performance,
and we describe our models.
The empirical results are
reported and interpreted in
Empirical Results section. Con-
clusion section provides the
concluding remarks and dis-
cusses possible extensions of
our study.
LITERATURE REVIEW AND
HYPOTHESES DEVELOPMENT
Some prior studies suggest
that acquirers realize positive
returns (Jensen & Ruback,
1983) or at least do not per-
form worse than their targets
(Franks, Harris, Titman, 1991).
Hansen and Lott (1996) exam-
ine the returns to bidders
acquiring private and public
targets and find that the bid-
ders experience higher returns
when purchasing a private firm.
However, other studies suggest
that the intended benefits of
acquisitions are often not real-
ized, and shareholders of the
acquirers often experience neg-
ative average returns (Roll,
1986; Bradley et al., 1988).
That bids are often made
over the market priceraises an
important question: if bidder
returns are not positive, then
why do firms makeacquisitions?
Previous research studies have
tried to explorebidding firms’
motives, other than value maxi-
mization, formergers. First,
debt-and-taxes hypothesis is con-
sidered a plausible explanation.
Asquith, Bruner, and Mullins
(1983) analyze the effect of per-
sonal taxes on the allocation
decisions of thefirm and show
that dividendsand stock
repurchasesare tax-inefficient
uses of financial slack, whereas
internal investment and acquisi-
tions createvalue by “sheltering
income from personal taxation.”
Majd and Myers (1985) argue
that conglomerate firms pay less
in taxes than their segments
would pay separately because of
the tax code’sasymmetric treat-
ment of gains andlosses and the
fact that “slack-rich”bidders
pair with “slack-poor”targetsto
create value. Second, some stud-
ies support the agencytheory or
the inefficientmanagement
The Journal of Corporate Accounting & Finance / July 201848
DOI 10.1002/jcaf © 2018 Wiley Periodicals, Inc.
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