What Is Greenmail?
Let me explain greenmail directly: it's when someone buys enough shares in a company to threaten a hostile takeover, pushing the target company to buy back those shares at a premium instead. In the world of mergers and acquisitions, this payment acts as a defense to halt the takeover bid. You see, the company ends up repurchasing the stock at a big premium to block the move, handing a hefty profit to the greenmailer.
Key Takeaways
- Greenmail happens when a greenmailer grabs a large chunk of a company's shares and threatens a hostile takeover.
- The target company fights back by buying its shares at a premium from the greenmailer.
- This practice surged and stirred controversy in the 1980s.
- After the 1980s, anti-greenmail rules, laws, regulations, and taxes made it tougher to pull off.
- Critics call it predatory like extortion, but defenders see it as a free-market fix for shareholder conflicts.
Understanding Greenmail
Think of greenmail like blackmail, but with money paid to halt aggressive actions. In mergers and acquisitions, it's an anti-takeover tactic where the target company pays a premium—called greenmail—to buy back its own shares at inflated prices from a corporate raider. Once they accept the payment, the raider usually agrees to drop the takeover and not buy more shares for a set period.
The word 'greenmail' comes from blending blackmail with greenbacks, which are U.S. dollars. Back in the 1980s, with all those corporate mergers, greenmail cases spiked. I suspect some raiders just wanted quick profits and started takeover bids without planning to finish them.
It's important to note that greenmail is far less common now due to laws, regulations, taxes, and anti-greenmail provisions. Though it still happens in subtle ways, federal and state rules have made it much harder. For instance, in 1987, the IRS slapped a 50% excise tax on greenmail profits. Companies also use defense tactics like poison pills to ward off activist investors and hostile bids.
An anti-greenmail provision is a clause in a company's charter that stops the board from approving such payments. This rule ensures the board doesn't take the easy route by paying off an unwanted buyer, which could leave shareholders in a worse spot.
Criticism of Greenmail
Many view greenmail as a predatory tactic, almost like extortion. From this angle, the greenmailer snaps up shares without any real intent to join in the company's operations as a true shareholder. Instead, they buy in just to pressure management with threats of a hostile takeover or other moves. If it works, critics say the greenmailer profits off the company without giving anything back.
Benefits of Greenmail
Despite the bad rap, some see greenmail as a free-market way to settle real shareholder disputes. A corporate raider might truly think the company's resources aren't being used well. One fix could be selling off assets profitably to firms that can use them better, benefiting the raider, other shareholders, and even society.
But management might not agree that their assets would fare better elsewhere. If they can scrape together funds for greenmail, it proves in a free-market sense that the assets should stay under their control. The raider skips the profits from asset sales by selling shares instead. If selling assets would net more money, greenmail wouldn't happen because it'd be unprofitable and inefficient. So, in this view, greenmail only occurs when it's actually beneficial.
Real World Example
Take Sir James Goldsmith, a famous corporate raider from the 1980s. He pulled off two big greenmail plays against St. Regis Paper Company and Goodyear Tire and Rubber Company. He made $51 million from St. Regis and $93 million from Goodyear in just two months.
In October 1986, Goldsmith bought an 11.5% stake in Goodyear at about $42 per share on average. He filed with the SEC to finance a takeover, planning to sell off all assets except the tire business. Goodyear's executives didn't like that at all.
Goldsmith then offered to sell his stake back for $49.50 a share—a classic strong-arm move, often called the ransom or goodbye kiss. Goodyear gave in and bought back 40 million shares from shareholders at $50 each, costing $2.9 billion. Right after, Goodyear's stock dropped to $42.
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