What is 'Greenmail'
Greenmail is the practice of buying a voting stake in a company with the threat of a hostile takeover to force the target company to buy back the stake at a premium. In the area of mergers and acquisitions, the greenmail payment is made in an attempt to stop the takeover bid. The target company is forced to repurchase the stock at a substantial premium to thwart the takeover.
BREAKING DOWN 'Greenmail'Like blackmail, greenmail is money that is paid to an entity to make it stop an aggressive behavior. In mergers and acquisitions, it is an anti-takeover measure where the target company pays a premium, known as greenmail, to purchase its own stock shares back (at inflated prices) from a corporate raider. Once the raider accepts the greenmail payment, generally it agrees to stop pursuing the takeover and not to purchase any more shares for a specified number of years. The term "greenmail" stems from a combination of blackmail and greenbacks (dollars). The great number of corporate mergers that occurred during the 1980s led to a wave of greenmailing. During that time, it was suspected that some corporate raiders initiated takeover bids to make money through greenmail with no intention of following through on the takeover.
The Gentleman Greenmailer
Sir James Goldsmith was one of the more notorious corporate raiders of the 1980s. He orchestrated two, high profile greenmail campaigns against St. Regis Paper Company and Goodyear Tire and Rubber Company. For his St. Regis venture, he reaped a $51 million profit, and he pocketed a profit of $93 million from his Goodyear raid from two month’s work.
In October 1986, Goldsmith purchased an 11.5% stake in Goodyear at an average share cost of $42 a share. He also filed with the Securities & Exchange Commission (SEC) for his plans to finance a takeover of the company. As part of his plans, he was going to have the company sell off all of its asset except its tire business. Seeing that Goodyear was putting up a defense of the takeover, he offered to sell his stake back to the company for $49.50 a share, which Goodyear eventually did. This forced Goodyear to repurchase 40 million shares from shareholders at $50 a share, costing the company $2.9 billion. Immediately following the repurchase, Goodyear’s share price fell to $42 a share.
Although it still occurs in various forms, federal and state regulations have made it much more difficult for companies to repurchase shares from short-term investors above market price. In 1987, the Internal Revenue Service introduced an excise tax of 50% on any greenmail profits. In addition, companies have introduced various defense mechanisms referred to as poison pills to deter activist investors from making hostile takeover bids.