Greenmail
Encyclopedia
Greenmail or greenmailing is the practice of purchasing enough shares in a firm to threaten a takeover
and thereby forcing the target firm to buy those shares back at a premium in order to suspend the takeover.
The term is a neologism derived from blackmail
and greenback
as commentators and journalists saw the practice of said corporate raiders as attempts by well-financed individuals to blackmail a company into handing over money by using the threat of a takeover.
s aim to generate large amounts of money by hostile takeover
s of large, often undervalued or inefficient (i.e. non-profit-maximizing) companies, by either asset stripping
and/or replacing management and employees. However, once having secured a large share of a target company, instead of completing the hostile takeover, the greenmailer offers to end the threat to the victim company by selling his share back to it, but at a substantial premium to the fair market stock price.
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. A company which agrees to buy back the bidder's stockholding 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 greenmailee, guaranteeing 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, which would have most certainly seen their ranks reduced or eliminated had the hostile takeover successfully gone through.
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 Murdock in 1984.
The St. Regis Paper Company provides an example of greenmail. When an investor group led by Sir James Goldsmith acquired 8.6% stake in St. Regis and expressed interest in taking over the paper concern, the company agreed to repurchase the shares at a premium. Goldsmith's group acquired the shares for an average price of $35.50 per share, a total of $109 million. It sold its stake at $52 per share, netting a profit of $51 million. Shortly after the payoff in March 1984, St. Regis became the target of publisher Rupert Murdoch. St Regis turned to Champion International and agreed to a $1.84 billion takeover. Murdoch tendered his 5.6% stake in St. Regis to the Champion offer for a profit. (Source: J. Fred Weston, Mark L.Mitchell J. Harold Mulherin -- Takeovers, Restructuring, and Corporate Governance: page 529)
Cases
and in Federal tax treatment of greenmail gains (a 50% excise tax) have all made greenmail far less common since the early 1990s (see 26 U.S.C. § 5881, and 26 C.F.R. Part 156, notably § 156.5881-1 ff.).
Takeover
In business, a takeover is the purchase of one company by another . In the UK, the term refers to the acquisition of a public company whose shares are listed on a stock exchange, in contrast to the acquisition of a private company.- Friendly takeovers :Before a bidder makes an offer for another...
and thereby forcing the target firm to buy those shares back at a premium in order to suspend the takeover.
The term is a neologism derived from blackmail
Blackmail
In common usage, blackmail is a crime involving threats to reveal substantially true or false information about a person to the public, a family member, or associates unless a demand is met. It may be defined as coercion involving threats of physical harm, threat of criminal prosecution, or threats...
and greenback
Greenback
Greenback may refer to:In currency:* Greenback , a fiat currency issued during the American Civil War**United States Note**Demand Note, issued in 1861–62* A modern United States Federal Reserve Note...
as commentators and journalists saw the practice of said corporate raiders as attempts by well-financed individuals to blackmail a company into handing over money by using the threat of a takeover.
Tactic
Corporate raidCorporate raid
A corporate raid is an American English business term for buying a large interest in a corporation and then using voting rights to enact measures directed at increasing the share value...
s aim to generate large amounts of money by hostile takeover
Takeover
In business, a takeover is the purchase of one company by another . In the UK, the term refers to the acquisition of a public company whose shares are listed on a stock exchange, in contrast to the acquisition of a private company.- Friendly takeovers :Before a bidder makes an offer for another...
s of large, often undervalued or inefficient (i.e. non-profit-maximizing) companies, by either asset stripping
Asset stripping
Asset stripping involves selling the assets of a business individually at a profit. The term is generally used in a pejorative sense as such activity is not considered productive to the economy. Asset stripping is considered to be a problem in economies such as Russia or China that are making a...
and/or replacing management and employees. However, once having secured a large share of a target company, instead of completing the hostile takeover, the greenmailer offers to end the threat to the victim company by selling his share back to it, but at a substantial premium to the fair market stock price.
From the viewpoint of the target, the ransom
Ransom
Ransom is the practice of holding a prisoner or item to extort money or property to secure their release, or it can refer to the sum of money involved.In an early German law, a similar concept was called bad influence...
payment may be referred to as a goodbye kiss. The origin of the term as a business metaphor
Metaphor
A metaphor is a literary figure of speech that uses an image, story or tangible thing to represent a less tangible thing or some intangible quality or idea; e.g., "Her eyes were glistening jewels." Metaphor may also be used for any rhetorical figures of speech that achieve their effects via...
is unclear. A company which agrees to buy back the bidder's stockholding 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 greenmailee, guaranteeing 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, which 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 GoldsmithJames Goldsmith
Sir James Michael "Jimmy" Goldsmith was an Anglo-French billionaire financier and tycoon. Towards the end of his life, he became a magazine publisher and a politician. In 1994, he was elected to represent France as a Member of the European Parliament and he subsequently founded the short-lived...
during the 1980s. In the latter example, Goldsmith made $90 million from the Goodyear Tire and Rubber Company
Goodyear Tire and Rubber Company
The Goodyear Tire & Rubber Company was founded in 1898 by Frank Seiberling. Goodyear manufactures tires for automobiles, commercial trucks, light trucks, SUVs, race cars, airplanes, farm equipment and heavy earth-mover machinery....
in the 1980s in this manner. Occidental Petroleum
Occidental Petroleum
Occidental Petroleum Corporation is a California-based oil and gas exploration and production company with operations in the United States, the Middle East, North Africa, and South America...
paid greenmail to David Murdock in 1984.
The St. Regis Paper Company provides an example of greenmail. When an investor group led by Sir James Goldsmith acquired 8.6% stake in St. Regis and expressed interest in taking over the paper concern, the company agreed to repurchase the shares at a premium. Goldsmith's group acquired the shares for an average price of $35.50 per share, a total of $109 million. It sold its stake at $52 per share, netting a profit of $51 million. Shortly after the payoff in March 1984, St. Regis became the target of publisher Rupert Murdoch. St Regis turned to Champion International and agreed to a $1.84 billion takeover. Murdoch tendered his 5.6% stake in St. Regis to the Champion offer for a profit. (Source: J. Fred Weston, Mark L.Mitchell J. Harold Mulherin -- Takeovers, Restructuring, and Corporate Governance: page 529)
Cases
- Viacom Int'l, Inc. v. Icahn, 747 F. Supp. 205 (S.D.N.Y. 1990)
- Polk v. Good, 507 A.2d 531 (Del. 1986).
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 26 U.S.C. § 5881, and 26 C.F.R. Part 156, notably § 156.5881-1 ff.).
See also
- EconomicsEconomicsEconomics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
- Industrial organizationIndustrial organizationIndustrial organization is the field of economics that builds on the theory of the firm in examining the structure of, and boundaries between, firms and markets....
- Mergers and acquisitionsMergers and acquisitionsMergers and acquisitions refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling, dividing and combining of different companies and similar entities that can help an enterprise grow rapidly in its sector or location of origin, or a new field or...
- MicroeconomicsMicroeconomicsMicroeconomics is a branch of economics that studies the behavior of how the individual modern household and firms make decisions to allocate limited resources. Typically, it applies to markets where goods or services are being bought and sold...
- PiracyPiracyPiracy is an act of robbery or criminal violence at sea. The term can include acts committed on land, in the air, or in other major bodies of water or on a shore. It does not normally include crimes committed against persons traveling on the same vessel as the perpetrator...
External links
- Dawn Raid at Investopedia