Last Updated Nov 23, 2009 7:08 AM EST
If a hostile bid is an offer from an opportunist company the directors think unsuitable, then a white knight is an equally unsuitable opportunist company that the board sees as its saviour. The difference between them is that the white knight is the firm that makes the second bid.
Yet Cadbury chairman Roger Carr clearly prefers Hershey, saying it's business model is more aligned with his own.
We have yet to see Cadbury's formal defence against the Kraft offer but much has been made by its supporters of the threat of UK jobs going abroad and the danger of losing an iconic British brand. Yet the choice between Kraft and Hershey is the difference between an American company famous for its cheese but which makes Terry's and Toblerone chocolate products, and an American company famous for its chocolate but whose lines include peanut butter and milk flavourings. Cadbury's fans cannot play the nationalist card then opt for a firm just as foreign as Kraft.
Takeover history is full of company's that jumped from one bidder's frying pan into another bidder's fire in the belief the second opportunist must be preferable to the first. In many cases directors are merely conceding they have lost the battle for independence but are determined to sell to anyone other than the original audacious bidder.
A rival offer may be useful in turning a single bid into an auction, thus securing a better price for shareholders. But the danger of even entertaining the idea of a white knight is to admit the directors are ready to raise the white flag: the debate is no longer whether the company is taken over, but about who buys it.
Boards should never place independence above shareholders' interests, but confessing they are prepared to recommend an offer is like placing their cards face up on the table.
For bidders who like game theory, waiting to make the second bid must seem tempting because of boards' willingness to accept offers from unsuitable white knights rather than agree terms with the first impudent bidder. But the wait could be long: if both Kraft and Hershey were playing that game, the reluctance of either to bid first could have ensured Cadbury received no offers at all.
However, if Cadbury does agree a deal with Hershey, Kraft will have suffered first mover disadvantage.
When the choice is between cash bids, boards must reject both or recommend the highest offer -- or shareholders will make the decision for them. But when a bidder offers shares, as Kraft has, directors can confuse the options to argue that the rival bidder is a white knight.
But fudge and waffle have no place in bid battles, even for confectioners.