Definitions

greenmail

greenmail

[green-meyl]
greenmail, payment, by a corporation that is a takeover target, of a premium price for the shares of its stock that have been accumulated by the potential buyer. In exchange, the potential buyer stops the takeover bid.
Greenmail or greenmailing refers to a legal business practice in a public stock market where one firm takes advantage of another firm by means of a falsely construed takeover.

Origin

The term is a neologism combining the terms greenback and blackmail, invented by journalists and commentators who saw the practices of corporate raiders as a form of blackmail. The target company is financially held hostage, and is legally forced to pay the greenmailer to go away.

Tactic

Greenmailing is a variation on the corporate raid or hostile takeover. The greenmailer commonly targets a publicly traded company that is cash rich but often undervalued, with large assets and possibly a solid customer base. Other targets are companies that are simply inefficient. In any case, the greenmailer seeks to avoid target companies that have implemented poison pills. The greenmailer isn't really interested in the business of the company. It doesn't want to own the company, improve it, or further build it up. It will, if forced to acquire the target, sell its parts off piecemeal, which can bring a greater profit than selling the whole target. This is called asset stripping and involves replacing management and firing employees. However, if a proper greenmail occurs, the greenmailer merely secures a significant stake in the target company. The greenmailer can offer to end the threat to the target company by selling its share back at a substantial premium. The target or "mark" can also go private with the same results: a profit to the greenmailer. The greenmailer gets away with no oversight, low overhead, and its profits. The target is left poorer and without the assets that attracted the raid in the beginning.

From the viewpoint of the target, the ransom payment may be referred to as a "goodbye kiss." The origin of the term as a business metaphor is unclear, although it will certainly be understood in context as kissing the greenmailer and, certainly, millions of dollars goodbye. A company which agrees to buy back the bidder's stock position in the target avoids being taken over. In return, the bidder agrees to abandon the takeover attempt and may sign a confidential agreement with the greenmailer who will agree not to resume the maneuver for a period of time.

While benefiting the predator, the company and its shareholders lose money. Greenmail also perpetuates the company's existing management and employees, who would have most certainly seen their ranks reduced or eliminated had the hostile takeover successfully gone through.

Examples

Greenmail proved lucrative for investors such as T. Boone Pickens and Sir James Goldsmith during the 1980s. In the latter example, Goldsmith made $90 million from the Goodyear Tire and Rubber Company in the 1980s in this manner. Occidental Petroleum paid greenmail to David Murdoch in 1984.

Prevention

Changes in the details of corporate ownership structure, in the investment markets generally, and the legal requirement in some jurisdictions for companies to impose limits for launching formal bids, or obligations to seek shareholder approval for the buyback of its own shares, and in Federal tax treatment of greenmail gains (a 50% excise tax) have all made greenmail far less common since the early 1990s.

See also

Notes

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