What is Whitemail?
240 reads · Last updated: December 5, 2024
Whitemail is a defensive strategy that a takeover target can use to try to thwart a hostile takeover attempt. Whitemail involves the target firm issuing a large number of shares at below-market prices, which are then sold to a friendly third party.This helps the target avoid the takeover by increasing the number of shares the acquirer must purchase in order to gain control, thus increasing the price of the takeover. It also dilutes the firm's shares. Plus, since a friendly third party now owns and controls a large block of shares, the aggregate number of friendly shareholders increases.If the whitemail strategy is successful in discouraging the takeover, then the company can either buy back the issued shares or leave them outstanding.
Definition
The White Knight Strategy is a defensive tactic used by target companies to thwart hostile takeover attempts. It involves issuing a large number of shares at a price below market value and selling them to a friendly third party, thereby increasing the number of shares the acquirer must purchase, raising the acquisition cost, and diluting existing shares.
Origin
The White Knight Strategy originated in the 1980s during a period of frequent corporate mergers and acquisitions, as companies sought ways to protect themselves from hostile takeovers. The strategy's name reflects its 'friendly' nature, involving a third party to help fend off the acquisition.
Categories and Features
The White Knight Strategy can be categorized into two types: issuing new shares to a friendly party or transferring existing shares to a friendly party. Its features include increasing acquisition costs, diluting shares, and increasing the number of friendly shareholders. It is typically applied when a company faces a hostile takeover. The advantage is effectively blocking the takeover, while the disadvantage is potential shareholder equity dilution.
Case Studies
Case 1: In the 1980s, a large retail company faced a hostile takeover threat and successfully introduced a friendly investment firm through the White Knight Strategy by issuing new shares and selling them to the firm, ultimately blocking the takeover. Case 2: A tech company in 2010 faced a hostile takeover and quickly transferred some shares to a friendly enterprise, successfully maintaining its independence.
Common Issues
Investors may worry that the White Knight Strategy could lead to shareholder equity dilution or negatively impact corporate governance. Additionally, if the strategy fails, it might result in a drop in the company's stock price. A common misconception is that this strategy always succeeds, but its effectiveness depends on the specific circumstances.
