Greenmail
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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.
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[edit] Tactic
Corporate raids aim to generate large amounts of money by hostile takeovers of large, often undervalued or inefficient 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, although it will certainly be understood in context as kissing the greenmailer and, certainly, millions of dollars goodbye. 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 greenmailer who will agree not to resume the maneuver for a period of time.
Whilst 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 have seen their ranks reduced or eliminated had the hostile takeover successfully gone through.
[edit] Examples
Greenmail proved lucrative for investors such as T. Boone Pickens and Sir James Goldsmith 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 Murdoch in 1984.
[edit] 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)[1] have all made greenmail far less common since the early 1990s.
[edit] Origins of term
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.
