Definition
Greenmail is a strategy used in corporate finance where a large block of stock is purchased by an entity, prompting the target company to buy back the shares at a premium to prevent a potential takeover. Essentially, it’s a type of corporate raiding, where the stockholder profits from selling back at an increased price. The term is a mix of ‘greenback’ (slang for cash) and ‘blackmail’.
Key Takeaways
- Greenmail is a tactic used in corporate finance where a large block of stock is bought by an interested party who threatens a hostile takeover but is willing to sell the stock back to the company at a higher price.
- This strategy can be viewed as controversial, as it may cause short-term financial strain on a company. Critics describe greenmail as corporate blackmail, as it may not consider the best interests of existing shareholders and potential investors.
- Some companies implement anti-greenmail provisions in their charter to protect themselves. These provisions require shareholder approval before the company can pay greenmail.
Importance
Greenmail is an important finance term as it refers to a strategic move in corporate finance used to repel hostile takeovers.
In greenmail, a large block of stock is bought by an entity, often to mount a hostile takeover bid.
The targeted company then fights off the advance by buying back those shares at a premium.
While this typically benefits the individual or institution that bought the shares, it can be controversial as it can disadvantage other shareholders and potentially ward off takeover attempts that might have otherwise benefited the company and its shareholders.
Therefore, understanding the implications and nuances of greenmail can be crucial for corporate decision-making, shareholder interests and other stakeholder considerations.
Explanation
Greenmail is a strategic maneuver in corporate finance, usually employed as a defensive tactic against hostile takeovers. It was common in the U.S.
during the 1980s but has since decreased due to regulation and public scrutiny. The principal purpose of greenmail is to protect the interest of incumbent management, fend off hostile bidders, and ensure business continuity without drastic restructuring usually associated with corporate takeovers.
In practical terms, greenmail involves the corporation buying back its own shares at a premium price from the hostile bidder. By doing this, the company isn’t only securing control of its shares but also providing a profitable exit for the potential acquirer.
This action simultaneously eliminates the possibility of the takeover and naturally serves as a deterrent for future unsolicited bidders, all while serving the interests of existing management.
Examples of Greenmail
Greenmail is a corporate maneuver in which a company or an individual purchases enough shares in an organization to threaten a takeover, forcing the targeted company to buy back their own shares usually at a higher price. Here are three real-world examples:**Sir James Goldsmith and Goodyear Tire & Rubber Company (1986)**: British financier, Sir James Goldsmith bought
5% of Goodyear’s stocks, threatened a takeover, and asked them to purchase its shares back for $50 per share while the market price was only $
Goldsmith made more than $90 million in profit from this greenmail action.**Carl Icahn and Saxon Industries (1980s)**: Carl Icahn, a renowned corporate raider, in the 1980s, purchased a significant amount of shares in Saxon Industries, an industrial pump manufacturer. Fearing a hostile takeover, Saxon Industries was compelled to repurchase shares, providing Icahn with a massive profit.
**T. Boone Pickens and Newmont Mining (1987)**: T. Boone Pickens, the corporate raider, targeted Newmont Mining by buying a considerable amount of its shares. To avoid a hostile takeover, Newmont was forced to buy those shares back, costing them around $190 million but leaving Pickens with a substantial profit.Please note that nowadays, many jurisdictions and companies have various methods to discourage greenmail, like laws against it or ‘poison pill’ strategies.
FAQs about Greenmail
What is Greenmail?
Greenmail is an act where a large block of stock is bought by an individual or corporate entity to force the target company to repurchase the shares at a premium. It’s a strategy used to prevent hostile takeovers.
How does Greenmail work?
When a corporation or an individual sees a company that’s vulnerable to a hostile takeover, they buy a large amount of its stock. The threat of taking control forces the target company to buy back their stock at higher prices, resulting in a profit for the ‘greenmailer’.
Is Greenmail legal?
Greenmail was a common practice in the 1980s but it became less popular after laws were enacted to curtail it. However, greenmail is still legal and occasionally occurs, although it’s generally seen as negative and unethical by stakeholders and the market.
What effects does Greenmail have on a company?
The effect of Greenmail on a company can be significant. It can lead to a decrease in the company’s available resources as they have to spend large amounts of money to repurchase their own stock. Furthermore, it can create instability in the stock market and can detrimentally impact the company’s reputation.
Related Entrepreneurship Terms
- Shareholder Rights Plan
- Corporate Takeover
- Hostile Bid
- Poison Pill
- White Knight
Sources for More Information
- Investopedia: A comprehensive web resource offering definitions and articles on a wide range of financial and investing terms.
- Reuters: An international news organisation that provides news on finance, stocks, and market data.
- Bloomberg: A global leader in business and financial data, news and insight.
- Financial Times: An international daily newspaper with a special emphasis on business and economic news.
