What exactly is “greenmail”?
To engage in greenmail, one must amass enough stock in a company to threaten a hostile takeover, which in turn causes the target company to repurchase its own shares at a higher price.
A greenmail payment is a defensive tactic used by corporations in mergers and acquisitions to prevent takeover attempts.
The greenmailer makes a killing when the target company repurchases shares at a huge premium to stop the takeover.
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A Deciphering Greenmail
Funds given to an organization in order to stop or prevent hostile actions are known as greenmail, which is similar to blackmail.
Greenmail is a tactic used in mergers and acquisitions to prevent takeovers.
It involves the target company paying a premium to the corporate raider so that it can buy back its own shares at a higher price.
The raider usually agrees to end the takeover and not buy more shares for a while after receiving the greenmail money.
The term “greenmail” is an amalgam of the words “blackmail” and “greenbacks,” the currency of the United States.
Greenmail increased dramatically in the 1980s due to the high volume of corporate mergers during that decade.
People back then probably thought that some corporate raiders were just interested in making a quick buck and wouldn’t bother to see the takeover through to completion.
Important: Greenmail has become considerably rarer due to legislation, regulations, taxation, and anti-greenmail measures.
There are numerous covert forms of greenmail, but the practice has become much more difficult to engage in due to a number of regulations enacted at the federal and state levels.
The greenmail earnings were subject to a 50% excise tax that was put in place by the Internal Revenue Service (IRS) in 1987.
To further discourage activist investors from launching hostile takeover attempts, corporations have employed a number of defensive tactics commonly referred to as poison pills.
The board of directors of a corporation cannot approve greenmail payments because of an anti-greenmail clause in the company’s charter.
Shareholders would be hurt by an anti-greenmail rule since it would make it impossible for a board to hastily pay an unsavory buyer of the company’s stock.
Evaluating Greenmail
For many, greenmail is nothing more than an extortionate predatory tactic.
The greenmailer who buys shares has no intention of being involved with the company’s operations in any way.
The sole purpose of the greenmailer’s share acquisition is to threaten management with a hostile takeover or other similar actions.
If successful, the greenmailer, according to critics, gains at the expense of the company without providing anything in return.
Fast Fact: “Greenmail” refers to blackmail in a similar vein, with “green” standing for actual money.
What Makes Greenmail Beneficial
Many forms of greenmail may be viewed as free-market solutions to actual shareholder disputes, despite its evil reputation.
An organization’s resources may be mismanaged, according to a corporate raider.
One possibility is to sell off assets at a profit to other businesses that could put them to better use.
Everyone from the corporate raider to the other shareholders to society as a whole could benefit from this deal.
However, the company’s upper echelons might disagree with the corporate raider’s assessment of who else could make better use of the company’s assets.
If management is able to secure the funds, they can use them for greenmail instead.
This provides some evidence from the free market that the assets should remain under the control of the firm.
The corporate raider gives up the chance to profit from selling assets and instead chooses to sell shares.
Greenmail doesn’t happen if the raider can increase their revenue by selling the assets.
It’s not profitable and it’s not economically efficient. As a result, greenmail happens precisely when it benefits this viewpoint.
Useful Example
In the 1980s, Sir James Goldsmith was known for his raids on businesses.
Against the St. Regis Paper Company and the Goodyear Tire and Rubber Company (GT), he ran two notable greenmail campaigns.
Within two months of acquiring Goodyear, Goldsmith had made $93 million and $51 million from his St. Regis venture.
Buying 11.5% of Goodyear in October 1986 for $42 a share was a smart move by Goldsmith.
In order to raise capital for a takeover of the company, he approached the SEC with proposals.
His plan included selling off all of the company’s assets except for its tire division.
Goodyear management was not very enthusiastic about this proposal.
In an effort to overcome Goodyear’s resistance, Goldsmith proposed selling back his shares to the company for $49.50 each.
Some people call this kind of demand for payment a ransom, while others call it a goodbye kiss.
Finally, for $2.9 billion, Goodyear gave in and bought back 40 million shares from investors at $50 each.
The stock price of Goodyear dropped to $42 not long after the repurchase.
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