What is White Squire Defence?
A White Squire Defence is a defensive strategy to ward off a hostile takeover attempt. In this strategy, an investor or a cordial company comes forward to help another company in danger of being taken over in a hostile manner. It buys a considerable stake in the target company, which is enough to prevent its hostile takeover. However, the investor does not completely take over the company but only a part of it. There remains no change in the operational status of the company. It continues to operate the same way it used to. Moreover, there is no change even in its management though there is a change in the ownership.
The idea behind such a type of defence is that the investor should buy enough stake in the company to make it impossible for the acquirer company making the hostile bid to go ahead with its plans. The effective situation would be that the acquirer company would not be able to garner controlling interest. Because the owners and the fresh investor put together will have a more significant chunk than the shareholding available for the acquirer company. The hostile bid attempt will hence be useless since it cannot control the company and its management. The White Squire will act as a saviour and foil the hostile takeover attempt. Once the threat of a takeover passes away, the investor can sell off its stake back to the company and exit.
Advantages of White Squire Defence
Complete Control and Independence
The White Squire Defence is the perfect kind of defence in the short term for any company. The investor buys just enough stake to block the bid of the company doing the hostile takeover. There is no loss of control and independence in the target company, and its Board and other employees continue to operate as before. Hence, the hostile bid is taken care of without transferring the complete ownership.
Time for Strategy Formulation
The White Squire defence mechanism provides time for the target company to think and strategize. It can come up with stronger defences and strategies to protect itself from any hostile takeover attempt shortly, either from the same company or from some other company.
The White Squire Defence mechanism often results in raising the bid amount for the hostile takeover. The company engaging in the hostile takeover raises its bid amount per share to make its offer more attractive. This may also lure the friendly investor into selling off his stake to it at a higher price and clear the way for the takeover. This eventually benefits the company, management, and other stakeholders.
Disadvantages of White Squire Defence
Incentives to the Investor
The biggest disadvantage of the White squire defence is the fact that the investor has to be given various incentives to stick to his commitment. The allurement could be in terms of a hefty discount on the purchase price of shares or some repurchase arrangement at a higher value or some indirect benefits to the investor. The company may promise generous dividends on the shares. Also, the investor may be offered a seat on the Board of Directors to give a sense of ownership and responsibility. Thus, these incentives can result in monetary loss as well as loss of control over the Board and its decision-making
Risk of Changing Sides
There is always a constant risk of the investor changing sides and teaming up with the company engaged in the hostile takeover. The investor can sell his stake in the target company at a premium to the hostile company and exit. The target company will then be exposed to the hostile bid once again and lose its stand.
From the nature of the structure, it is quite clear that the White Squire defence strategy is only a temporary solution. It is not a permanent solution. Of course, it can give breathing time to the target company. And during that period it can refine its strategies to avoid any hostile takeover bid. Any friendly investor may not remain stuck with the company. Nor he would like to keep the investment for a longer period where he sees practically no return. It will soon look to sell off its stake and liquidate its position. So that he can use the money in its interest area or where it may get higher returns.
Let us go through a real-world example to understand the White Squire Defence mechanism. Media and marketing solutions company Gannett made a hostile takeover bid of $12.25 per share for the company Tronc or Tribune Publishing in April 2016. The Chairman of the company said that the bid undervalues the company and started looking for ways to block the takeover attempt.
Gannett then raised its bid to $15 per share to go through the deal. Tronc then brought in the White Squire defence. They sold a 12.9% stake in the company to a billionaire investor Patrick Soon-Shiong at $15 per share. The company justified its step as a saving attempt of free journalism. Through this sale of shareholding, the new investor became the company’s second-biggest shareholder. The hostile takeover attempt by Gannett turned futile, and it could not complete its takeover.
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