Greenmail is a strategic move in corporate finance where an entity buys a significant amount of a company’s shares to threaten a hostile takeover, compelling the target company to repurchase its shares at a premium. This defensive action is designed to avert the takeover bid and results in a substantial profit for the greenmailer.
Key Insights into Greenmail
- Greenmail involves acquiring a large block of a company’s shares to put forth a hostile takeover threat.
- To counter the takeover attempt, the target company repurchases its shares from the greenmailer at a premium price.
- This practice gained traction and controversy during the 1980s but has since become less common due to regulatory measures.
- Anti-greenmail provisions, laws, and taxes have made greenmail less feasible after the 1980s.
- Critics liken greenmail to extortion, while some defend it as a free-market response to shareholder disputes.
Understanding Greenmail
Greenmail, analogous to blackmail, involves the target company buying back its shares at inflated prices from a corporate raider to prevent a takeover. The greenmailer, after receiving payment, agrees to cease pursuing the takeover and refrain from additional share purchases for a stipulated period.
The term “greenmail” merges the concepts of blackmail and greenbacks (U.S. dollars). The wave of corporate mergers in the 1980s catalyzed a surge in greenmail activities. Some raiders aimed merely to profiteer through takeover threats, sans genuine acquisition intentions.
Modern regulations and anti-greenmail provisions have curtailed this practice. The 1987 introduction of a 50% excise tax on greenmail profits by the IRS made it less attractive, while companies implemented poison pills to deter hostile takeovers.
An anti-greenmail provision within a firm’s corporate charter restricts the board from sanctioning greenmail payments, protecting shareholders’ interests from exploitative buybacks.
Criticism of Greenmail
Greenmail faces criticism as a predatory, extortion-like maneuver. The greenmailer typically has no intent to contribute to the company’s operations but solely aims to pressure management with takeover threats for profit. Critics argue this financially benefits the greenmailer at the company’s expenses without reciprocating value.
Benefits of Greenmail
Notwithstanding its negative reputation, greenmail can sometimes be perceived as a free-market mechanism addressing shareholder conflicts. A corporate raider might believe their asset management strategy would enhance company value. If management opts to pay greenmail, it subtly affirms the company’s preference to retain control.
This perspective views greenmail as economically viable only when the greenmailer values internal operational control over liquidating assets, suggesting that it can reflect beneficial market-driven negotiations.
Real-World Example: Sir James Goldsmith’s Greenmail Campaigns
Sir James Goldsmith, a prominent corporate raider in the 1980s, led notable greenmail endeavors against St. Regis Paper Company and Goodyear Tire and Rubber Company. Goldsmith earned $51 million from St. Regis and $93 million from Goodyear in just two months.
In October 1986, Goldsmith acquired an 11.5% stake in Goodyear at $42 per share. He filed a takeover plan with the SEC, proposing the sale of all assets except the tire business, a plan met with resistance. Goldsmith offered to sell his stake back at $49.50 per share, and eventually, Goodyear repurchased 40 million shares at $50 each, costing the company $2.9 billion. Post-repurchase, Goodyear’s share price plummeted to $42.
Related Terms: Hostile Takeover, Corporate Raider, Poison Pill, Shareholder, Extortion, Free Market, Internal Revenue Service.
References
- Legal Information Institute, Cornell Law School. “26 U.S. Code Sec. 5881. Greenmail”.
