Greenmail

Definition

Greenmail refers to a strategy where a corporate raider buys a significant share of a company’s stock and then threatens a takeover, forcing executives to buy back the shares at a higher price to retain control. The term is derived from “blackmail,” as the executives pay a “ransom” to prevent the takeover. Greenmail is generally seen as detrimental to shareholder interests and is now regulated in the U.S. and several other countries.

Phonetic

The phonetics of the keyword ‘Greenmail’ is /ˈɡriːnmeɪl/.

Key Takeaways

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1. Greenmail is a strategy used in corporate finance which involves a large company purchasing a significant amount of stock shares from a smaller company in order to prevent a potential hostile takeover.
2. This practice tends to be controversial because it involves the larger company profiting from the transaction not necessarily because of the smaller company’s performance, but because of the threats posed to the smaller company.
3. Ultimately, even though Greenmail might offer immediate benefits to the smaller company and its shareholders, it can potentially discourage future investment due to the perceived instability or vulnerability of the company.

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Importance

Greenmail is an important business/finance term because it represents a strategy used in corporate finance, particularly during hostile takeover attempts. It refers to the process where the target company pays a premium to purchase back its own shares from a corporate raider to deter the threat of a takeover. While this can be a useful defensive measure that allows the company to regain control over its shares and maintain independence, it can also be controversial. Critics argue that greenmail can favor the interests of shareholders who indulge in such practices, rather than benefiting the overall shareholder community. Furthermore, it can drain a company’s finances and may not guarantee a stop to additional future takeover attempts. Understanding greenmail helps in gaining a thorough insight into the dynamics of corporate takeovers and the defense mechanisms employed by companies.

Explanation

Greenmail is a strategic maneuver during hostile takeover attempts, widely seen in the corporate world to avert possible hostile acquisitions. In a typical Greenmail scenario, a company or individual identifies a corporation they consider undervalued or struggling and begins buying up substantial amounts of its stock. This significant stake in the company makes them a viable threat for a takeover, thereby prompting the targeted company’s management to defend its territory. The primary purpose of Greenmail is to pressure the targeted company into repurchasing its stock at a premium to prevent a hostile takeover, turning it into a profitable venture for the threatening party. That is, Greenmail serves as a unique tool to make profits in a short period by creating a takeover threat and later selling the shares back at a higher price. Although highly controversial and seen as detrimental to shareholder interests, Greenmail, however, tremendously benefits the greenmailer by offering considerable gains without taking over the company.

Examples

Greenmail refers to the process where a large block of stock is purchased by an outside entity, threatening a hostile takeover, and then sold back to the company at a higher price. Here are three real-world examples:1. Goodyear Tire & Rubber Company and Sir James Goldsmith (1986): The British financier had accumulated about 11.5% of Goodyear’s stock, planning a hostile takeover. To deter this, the company had to buy back the stocks at a premium price. It resulted in Goodyear paying about $93 per share, more than twice the market price, and spending a total of $2.6 billion.2. Disney and Saul Steinberg (1984): Saul Steinberg, an American financier, threatened a takeover of Disney by buying a large stake in the company’s stock. To prevent the takeover, Disney ended up buying back those shares at a premium price. The company had to buy back the shares for $325 million, a move which essentially saved Disney but resulted in significant layoffs and cost-cutting measures.3. Time Inc. and Paramount Communications (1989): Paramount Communications aimed for a hostile takeover of Time Inc. by offering $200 per share for 51% of Time’s outstanding stock. To prevent this, Time Inc. accelerated its plans for a merger with Warner Communications, effectively diluting Paramount’s holdings. This “white knight” approach is a variant of greenmail, where instead of buying back the shares, another strategy is employed to increase the capital and prevent the takeover.

Frequently Asked Questions(FAQ)

Related Finance Terms

• Corporate Takeover
• Shareholder Rights Plan
• Hostile Bid
• Stakeholder
• White Knight

Sources for More Information

• Investopedia
• Corporate Finance Institute
• Financial Times
• The Balance