What is 'Greenmail'

Greenmail is the practice of buying enough shares in a company to threaten a hostile takeover so that the target will repurchase its shares at a premium. Regarding mergers and acquisitions, the greenmail payment is made 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 paid to an entity to stop or prevent aggressive behavior.  In mergers and acquisitions, it is an anti-takeover measure in which the target company pays a premium, known as greenmail, to purchase its own stock shares back at inflated prices from a corporate raider. After accepting the greenmail payment, the raider generally agrees to discontinue the takeover and not purchase any more shares for a specific time. 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, seeking only to profit, initiated takeover bids with no intention of following through on the takeover.

The Gentleman Greenmailer

Sir James Goldsmith was a notorious corporate raider of the 1980s. He orchestrated two, high-profile greenmail campaigns against St. Regis Paper Company and Goodyear Tire and Rubber Company. Goldsmith earned $51 million from his St. Regis venture and $93 million from his Goodyear raid, which took only 2 months.

In October 1986, Goldsmith purchased an 11.5% stake in Goodyear at an average cost of $42 a share. He also filed plans to finance a takeover of the company with the Securities & Exchange Commission (SEC). Part of his plan was to have the company sell off all of its assets except its tire business, which was not received well by Goodyear executives. In response to Goodyear's resistance, he proposed to sell his stake back to the company for $49.50 a share; this strong-arm proposal is often referred to as the ransom or the goodbye kiss.  Eventually, Goodyear accepted and subsequently repurchased 40 million shares from shareholders at $50 per share, which cost the company $2.9 billion. Immediately following the repurchase, Goodyear’s share price fell to $42.  

Greenmail Outlawed

Although greenmailing 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 (IRS) introduced an excise tax of 50% on greenmail profits. In addition, companies have introduced various defense mechanisms, referred to as poison pills, to deter activist investors from making hostile takeover bids.

Despite the efforts to deter and prevent greenmailing, it is still being practiced.  Greenmail does not always present the threat of a hostile takeover; sometimes, it presents the threat of a proxy contest that can substantially affect management and operations.   For example, from 2011 to 2013, Icahn Associates, run by activist investor Carl Icahn, held a majority stake in WebMD.  To restrict his ability to alter their leadership structure, WebMD repurchased its shares for approximately $177.3 million in 2013.

RELATED TERMS
  1. Anti-Greenmail Provision

    Anti-greenmail provision is a special clause in a firm's corporate ...
  2. Killer Bees

    Killer bees helped companies avoid takeovers, during the 198 ...
  3. Raider

    A raider, in business, is a private equity firm that targets ...
  4. Hostile Takeover

    A hostile takeover is the acquisition of one company by another ...
  5. Takeover

    A takeover occurs when an acquiring company makes a bid in an ...
  6. Takeover Artist

    An investor or company whose primary goal is to identify companies ...
Related Articles
  1. Insights

    Carl Icahn Biography

    Carl Icahn is a New-York-based investor and one of the 50 richest men in the world, with more than $20 billion in personal assets. He is known for his brash style as a corporate raider and as ...
  2. Trading

    Trade Takeover Stocks With Merger Arbitrage

    This high-risk strategy attempts to profit from price discrepancies that arise during acquisitions.
  3. Investing

    The Wonderful World Of Mergers

    While acquisitions can be hostile, these varied mergers are always friendly.
  4. Managing Wealth

    Investopedia's Oddest Business and Investing Terms

    The oddest business and investing terms found on Investopedia.
  5. Investing

    The Merger - What To Do When Companies Converge

    Learn how to invest in companies before, during and after they join together.
  6. Insights

    Senators Want More Scrutiny of US Food Takeovers

    Senators draft a bill calling for closer scrutiny of foreign U.S. food takeovers after investments from China hit record highs.
  7. Insights

    Ariad Receives Interest as a Buyout Candidate

    Following failed buyout talks with Baxalta last year, Ariad’s stock is spiking amid rumors of a takeover.
  8. Investing

    A New Corporate Governance Initiative In Japan

    Expectations are low that Japan can create a corporate governance climate that meets global standards, but a new initiative is aimed at doing just that.
  9. Investing

    Megadeals Push Global Takeovers Past $1.2 Trillion

    Numerous factors are set to drive another record year for M&A, despite political uncertainty.
RELATED FAQS
  1. How can a company resist a hostile takeover?

    Learn about some of the defensive strategies a public company's board of directors might utilize to prevent a hostile bidder ... Read Answer >>
  2. What's the difference between a merger and a hostile takeover?

    Understand the difference between a merger and a hostile takeover, including the different ways one company can acquire another, ... Read Answer >>
  3. A Hostile Takeover vs. Friendly Takeover

    Learn about the difference between a hostile takeover and a friendly takeover, and understand how proxy fights and tender ... Read Answer >>
  4. How company stocks move during an acquisition

    During an acquisition, there's a short-term impact on the stock prices of both companies. Typically, the target company's ... Read Answer >>
  5. All-stock vs All-cash M&A deal

    Mergers and acquisitions are becoming increasingly popular forms of corporate restructuring. Learn how it can affect the ... Read Answer >>
  6. How long does it take for a merger to go through?

    Corporate mergers and acquisitions can vary considerably in the time they take to be completed. There are a number of individual ... Read Answer >>
Trading Center