What’s Greenmail?
Greenmail is the practice of threatening a hostile takeover by purchasing enough shares in a firm to force the target company to repurchase them at a premium. As a defense against takeover bids, the corporation pays Greenmail. The target business must repurchase the stock at a premium to stop the takeover, giving the greenmailer a significant profit.
Understanding Greenmail
Like blackmail, greenmail involves paying someone to cease being violent. Greenmail is an anti-takeover tactic in mergers and acquisitions when the target business pays a premium to repurchase its shares at inflated prices from a corporate raider. After taking the greenmail payment, the raider usually stops the takeover and stops buying shares for a while.
The word “greenmail” combines blackmail and U.S. money. Greenmail rose in the 1980s due to business mergers. Some corporate raiders, wanting solely profit, may have begun takeover attempts without intending to complete the acquisition.
Due to rules, restrictions, tariffs, and anti-greenmail legislation, greenmail is rarer.
Despite its implicit existence, federal and state rules make greenmail harder. In 1987, the IRS imposed a 50% excise tax on greenmail earnings. 1 To dissuade activist investors from mounting aggressive takeover bids, firms have implemented defense measures known as poison pills.
A company’s charter may include an anti-greenmail provision that bars the board of directors from sanctioning greenmail payments. An anti-greenmail provision prevents boards from favoring undesirable acquirers, resulting in adverse outcomes for shareholders.
Greenmail criticism
Greenmail is considered a predatory technique that borders on extortion. This theory holds that greenmailers who acquire shares do not plan to engage in corporate operations. Greenmailers acquire shares to threaten management with a hostile takeover or other activities. Critics say if successful, the greenmailer earns at the company’s expense without contributing.
Greenmail is like blackmail, except “green” means real money.
Benefits of Greenmail
While often seen negatively, greenmail can be a legitimate remedy for shareholder conflicts in the free market. Companies may mismanage resources, according to corporate raiders. One option is to sell assets at a profit to other companies that can use them better. The corporate raider, other shareholders, and society may benefit from this arrangement.
However, the firm’s management may disagree with the corporate raider that others may use their assets better. Suppose management can afford GGreenmail instead. This is free-market proof that the business should keep the assets. By selling shares, the corporate raider avoids asset sales earnings. Greenmail is unprofitable and inefficient if the raider can sell the assets for more money. Greenmail only occurs when it benefits this view.
Real-World Example
Sir James Goldsmith was a prominent 1980s corporate raider. He launched two high-profile greenmail campaigns against St. Regis Paper and Goodyear Tire and Rubber. Goldsmith made $51 million from St. Regis and $93 million from his two-month Goodyear raid.
Goldsmith bought 11.5% of Goodyear for $42 per share in October 1986. He submitted plans to fund a corporate takeover to the Securities and Exchange Commission (SEC). He wanted the corporation to liquidate all its assets to save its tire business. Goodyear management disliked this proposal.
Goldsmith offered to sell his investment to Goodyear for $49.50 a share in response to its objections. Some call this strong-arm proposition a ransom or farewell kiss. Goodyear repurchased 40 million shareholder shares at $50 each, costing $2.9 billion. Goodyear’s share price dropped to $42 after the buyout.
Conclusion
- Greenmail involves buying a large chunk of a company’s shares and threatening a hostile takeover.
- Repurchasing shares at a premium from the greenmailer can help the target firm reject the acquisition.
- Greenmail became more common and controversial in the 1980s.
- After the 1980s, anti-greenmail laws, restrictions, and taxes made greenmail harder.
- Greenmail is a predatory activity like extortion, yet fans promote it as a free-market solution to shareholder conflicts.
