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Washington Mutual Is A White Knight

Background & Definitions

A "white knight" is a company that comes to the rescue of a corporation that is being taken over. In general, it is considered one of the anti-takeover defense tactics used to counter tender offers. Other tactics include poison pills, PacMan, and golden parachutes.

Tender Offer Offer made directly to a firm's shareholders to buy their shares.

Poison Pill An anti-takeover plan devised to automatically be activated when the company gets bought over in an unfriendly takeover. An example might be a plan whereby all the firm's debt becomes due if the current management is removed.

PacMan The name comes from the video game. It is another takeover repellent devised by management. For example, Bendix Corp. tried to take control of Martin-Marietta by a tender offer. When the takeover effort failed, Martin-Marietta counterattacked by buying Bendix’ stock in an attempt to take control of Bendix. Thus, Martin-Marietta became the PacMan. To counter, Bendix successfully courted Allied Corporation to come to its rescue. Allied bought Bendix so that Martin-Marietta could not buy enough control. In this case Allied was a White Knight.

Golden Parachute A plan devised by existing management stipulating that an acquiring company has to pay executives of the acquired company a substantial sum of money in the event of removing management.

Specifics

Great Western Financial Corp. agreed to be acquired by Washington Mutual Inc. in a stock swap valued at $6.6 billion. This practically eliminates the threat of a hostile takeover by H.F. Ahmanson of Great Western. Thus, Washington Mutual is referred to as a "white knight."

Great Western’s management was uneasy with Ahmanson’s offer, as it would have come at the expense of Great Western’s employees. The two thrift institutions both have considerable presence in Southern California, which they would have had to consolidate in order to post merger cost savings.

Great Western's shareholders would receive 0.9 share of Washington Mutual stock -- valued at $47.93 based on March 5's closing prices -- for each of their shares. That exceeds Ahmanson's offer, which is currently valued at $44.10 a share, or about $6.1 billion. Ahmanson's offer of 1.05 of its shares for each Great Western share, disclosed Feb. 18, was initially valued at $42.53 a share.

Market Reaction
The market was enthusiastic about the bid. Shares of Great Western, which were trading at $34 a share before Ahmanson's bid, surged $1.875 to $46.875 after the announcement on March 5. At the same time, Washington Mutual's shares also gained, rising 31.25 cents to $53.5625, while Ahmanson's shares slid $1.25 to $40.75.

The Emerging Company
A combination of Washington Mutual and Great Western would create the largest thrift in the country, with assets of about $87.4 billion. The new entity would have more than $60 billion in assets in California alone, the nation's most lucrative banking market. Currently, Great Western has a roughly 6% market share, with Washington Mutual at less than 5% as measured by deposits.

Source: WSJ March 6, 1997

By Alex Tajirian