In the business world, a yellow knight is a term used to describe a company that was once attempting to mount a takeover of another business, but has since changed strategies and is now trying to interest the targeted company in the idea of a merger. The reference to the knight being yellow in this instance is indicative of the fact that the former aggressor has determined that a takeover is not possible and now wants to use some other method as a means of establishing a connection with the former target. Part of the popular imagery of the yellow knight is a company that has become frightened off from the original goal, and is now willing to enter into a mutually beneficial relationship.
There are a number of reasons why a company may eventually move from a hostile takeover attempt and become a yellow knight. One reason has to do with the potential for success of the takeover. Should the company reach a conclusion that the takeover will not happen, either because the target has outmaneuvered the effort or because the attempt will require more resources than originally envisioned, the aggressor may decide that approach is no longer viable. Assuming there is still some compelling reason to want a relationship with the targeted company, the approach may switch to one that is more to the advantage of everyone concerned and less likely to be resisted.
Another reason for changing to a yellow knight situation involves changes in the circumstances of the company attempting the takeover. For example, should revenues begin to drop or the company suffer an unexpected loss due to some natural disaster or a political coup, resources to continue the takeover attempt may no longer be available. At that point, abandoning the takeover becomes prudent, while still leaving open the option for a possible merger.
The designation of a yellow knight is different from similar monikers used to describe the roles of companies in a takeover attempt. For example, a black knight is the business that is pursuing a hostile takeover, while a white knight is a company that comes to the rescue of the targeted company and mounts an acquisition attempt with the support of the target. While the yellow knight is no longer making attempts to take over a business, it is not unusual for a degree of pessimism and suspicion to linger in the new merger negotiations, based on the past attempt at the hostile takeover.