What Is Whitemail?

Whitemail is a defensive strategy that a takeover target can use to try to thwart a hostile takeover attempt. Whitemail involves the target firm issuing a large number of shares at below-market prices, which are then sold to a friendly third party.

This helps the target avoid the takeover by increasing the number of shares the acquirer must purchase in order to gain control, thus increasing the price of the takeover. It also dilutes the firm's shares. Plus, since a friendly third party now owns and controls a large block of shares, the aggregate number of friendly shareholders increases.

If the whitemail strategy is successful in discouraging the takeover, then the company can either buy back the issued shares or leave them outstanding.

Key Takeaways

  • Whitemail is a hostile takeover defense that involves issuing a large number of new shares to friendly shareholders.
  • The goal is to dilute the shares enough and secure sufficient proxy votes to fend off an unwanted acquirer.
  • A successful whitemail defense can conclude with the target company re-acquiring its new shares.

Understanding Whitemail

There are two main tactics employed to acquire a controlling interest in a company as a hostile takeover bid.

First, the acquirer may make a tender offer to the company's shareholders. A tender offer is a bid to buy a controlling share of the target's stock at a fixed price. The price is usually set above the current market price to allow the sellers a premium as an added incentive to sell their shares. This is a formal offer and may include specifications included by the acquirer such as an offer expiry window or other items. Paperwork must be filed with the Securities and Exchange Commission (SEC), and the acquirer must provide a summary of its plans for the target company to aid the target company's decision.

Many takeover defense strategies protect against tender offers, so often the proxy fight is utilized. The goal of a proxy fight is to replace board members who are not in favor of the takeover with new board members who would vote for the takeover. This is done by convincing shareholders that a change in management is needed and that the board members who would be appointed by the would-be acquirer are just what the doctor ordered.

Whitemail is a strategy that can be used to fend off an unwanted takeover attempt by issuing shares at a below-market price and selling them to friendly a third party. These new shares undermine the tender offer by making it relatively more expensive for the acquirer to attempt this route. At the same time, the new friendly shareholder will be less likely to agree to a tender offer or to a proxy fight to install new board members.

Whitemail is just one of several defensive strategies to avert a hostile takeover.

Example of Whitemail

XYZ Corporation has 1,000,000 shares outstanding. ABC Inc. wants to acquire XYZ Corp. and begins to buy up all of the shares they can in the public secondary market in an attempt to get to a controlling proportion of shares.

XYZ Corp. gets wind of this and proceeds to institute a whitemail policy. They issue 250,000 new shares at a significant discount to the current secondary market price and sell them all to DEF Industries, which is a company that XYZ has a good relationship with.

The increase of outstanding shares from 1,000,000 to 1,250,000 increases the number of shares ABC will need to purchase in order to gain a controlling interest. Plus, the voting rights of all XYZ shares are now diluted, reducing ABC's power to vote for board members who favor their takeover.