A company becomes a “white knight” when it acquires another company that was avoiding a hostile takeover by an undesired third party, often called black knight.The white knight is considered as a savior of the target company because in most cases existing management is not replaced, this option is utilized normally in post-takeover bid period.
Sometimes, another potential acquirer appears as “gray knight” during takeover bid period which is considered less attractive than white knight and more favorable than a lack knight.
Suppose, XYZ is a public limited company, its shareholders have just received a hostile takeover bid by ABC Company. The management of XYZ believes that the acquirer ABC may create difficulties for company and management itself. In this case, in order to avoid the hostile takeover, first management will prefer to avoid takeover however if it is unable to do so then it will favor to be acquired by a friendly supplier. If friendly supplier EFG avails this opportunity and acquires the XYZ, it will be called as a white knight.
Why it matters (Importance)
Management of Target Company prefers to be acquired by a white knight company than an undesired third-party because white knight offers friendly terms and usually do not replace current management.