greenmail

[GREEN, money + (BLACK)MAIL.]

(GREEN-mayl)

noun
The practice of buying a large quantity of a company's stock as a hostile takeover measure, and then selling it to the company at a higher price.

Etymology
From green (money) + mail (as in blackmail).

A situation in which a large block of stock is held by an unfriendly company. This forces the target company to repurchase the stock at a substantial premium to prevent a takeover. It is also known as a "Bon Voyage Bonus" or a "Goodbye Kiss".

Investopedia Says:
Not unlike blackmail, this is a dirty tactic, but it's very effective.

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Payment of a premium to a raider trying to take over a company through a proxy contest or other means. Also known as Bon Voyage Bonus, it is designed to thwart the takeover. By accepting the payment, the raider agrees not to buy any more shares or pursue the takeover any further for a specified number of years. See also Goodbye Kiss.

It was a good year for greed as well as green--green, that is, in the sense of money, deriving ultimately from the Greenback of United States currency invented in 1862. The year 1983 saw another American monetary invention: greenmail. This is a shade more lucrative than the ancient and dishonorable word, blackmail, from which its name derives. Blackmail began in the lawless territory between England and Scotland in the 1500s, when predatory bands of men demanded an unjustified rent, or black mail, from those who lived on the land. Such practices were not confined to those borderlands, so blackmail later was applied to any extortion of money under threat.

In America in the early 1980s, the fattest and easiest targets for blackmail were not individuals but corporations. And the pressure to make them pay could be applied openly and legally. All it required was a supply of cash to buy lots of stock in the company. A threat to take it over would be made, then the company would be allowed to buy back those shares at an inflated price, making a big profit for the "blackmailer" that could be used to attack another company. Because this practice operated in the financial markets (green), and because it was not hidden or illegal (black), someone called it greenmail, and the name stuck. "Corporations are scurrying to combat a perceived threat from those professional investors who practice 'greenmail'--putting pressure on a company to get a buy-out for cash," reported the National Law Journal in March 1983.

The idea of creating an off-color variant of blackmail may have come from graymail (1973), a name for a criminal defendant's threat to expose government secrets if prosecuted for betraying them. The CIA is said to have originated the word graymail, preferring that to the more ominous blackmail in such cases.

Green, meanwhile, also took on another new meaning, starting in the late 1960s. While corporate raiders were practicing greenmail, environmentalists were advocating green labeling and green taxes as part of a "green revolution" (1969) to protect the natural world from being ruined by humans.

A corporation's attempt to stop a takeover bid by paying a price above market value for stock held by the aggressor.

Greenmail is a practice in corporate mergers and acquisitions. Like blackmail, the concept after which it is named, greenmail is money paid to an aggressor to stop an act of aggression. In the case of greenmail, the aggressor is an investor attempting to take over a corporation by buying up a majority of its stock, and the money is paid to stop the takeover. The corporation under attack pays an inflated price to buy stock from the aggressor, known popularly as a corporate raider. After the greenmail payment, the takeover attempt is halted. The raider is richer; the corporation is poorer but retains control. During a great wave of corporate mergers in the 1980s, the practice of paying greenmail became controversial. Critics viewed it as harmful to U.S. business interests. Portraying the transaction as little more than a bribe, they argued that some corporate raiders began takeover bids simply to earn profits through greenmail. Corporate shareholders also protested the practice. By the mid-1990s, state legislatures had taken the lead in opposing greenmail through legislation.

The increase in corporate mergers in the 1980s made the hostile corporate takeover a familiar event. Before the decade's multi-billion-dollar takeovers, corporate mergers usually involved a mutual agreement. In contrast, hostile takeovers ignore the target corporation's management. One form of hostile takeover involves stock. Whoever owns the most stock controls the corporation. Instead of entering negotiations with management, corporate raiders go to the corporation's stockholders with offers to buy their stock. Not only the means but also the goals of these acquisitions differ from those of earlier acquisitions. Prior to the 1980s, mergers generally occurred when larger interests bought up smaller competitors in similar industries, with an eye toward dominating a particular market. In hostile takeovers, corporate raiders often intend to break up and sell a corporation after the takeover is complete. Their interest commonly lies in earning enormous short-term profits from selling a company's assets, motivating corporations to try to protect themselves against takeovers.

Greenmail is one of an array of strategies, ranging from changing corporate bylaws to acquiring debt that makes the corporation a less attractive target, used to deter raiders. It is an expensive alternative, as was illustrated when investor Saul P. Steinberg attempted to take over the Disney Corporation in 1984. Steinberg was known for his concerted efforts in the takeover field, having previously targeted Chemical Bank and Quaker State. In March 1984, his purchase of 6.3 percent of Disney's stock triggered concern at the corporation that a takeover was in progress. Disney management quickly announced an approximately $390 million acquisition of its own that would make the company less attractive. After this maneuver failed, Disney's directors ultimately bought Steinberg's stock to stop the takeover. Steinberg earned a profit of about $60 million.

The Disney case illustrates a major criticism of greenmail: other stockholders blame corporate directors for showing undue favoritism to corporate raiders, who are paid exorbitant sums for stock whereas the stockholders are not. This criticism formed the basis of a lawsuit that produced one of the few court decisions condemning greenmail outright. In 1984, Disney stockholders sued the corporation's directors as well as Steinberg and his fellow investors, seeking to recover the amount paid as greenmail. They won an injunction from the Superior Court of Los Angeles County, which placed Steinberg's profits from the sale in a trust. The verdict was upheld on appeal (Heckmann v. Ahmanson, 168 Cal. App. 3d 119, 214 Cal. Rptr. 177 [Cal. Ct. App. 1985]). In ordering the profits put in a trust, the court sought "to prevent unjust enrichment" that would otherwise "reward [Steinberg] for his wrongdoing." In 1989, Steinberg settled with the plaintiffs for approximately $21.1 million.

Although greenmail's heyday was in the 1980s, it continued to be controversial in the 1990s. Criticism of greenmail grew out of a larger condemnation of the way in which corporate raiders had rewritten the rules of mergers and acquisitions in an avaricious, shortsighted manner. Some critics viewed this trend harshly. In his 1995 work on the subject, Professor David C. Bayne portrayed greenmail as a pact involving embezzlement by corporate directors and blackmail by corporate raiders. Bayne said greenmail is "nothing other than a recondite species of the broader genus Corporate Bribery, and as such is intrinsically illegitimate." States increasingly viewed greenmail in the same light. Most states had enacted antitakeover laws, and several had anti-greenmail provisions. The Ohio and Pennsylvania laws were among the toughest, requiring raiders to return greenmail profits to the target corporation (Ohio Rev. Code Ann. § 1707.043 [Anderson Supp. 1990]; 15 Pa. Cons. Stat. Ann. §§ 2571-2576 [Purdon Supp. 1991]). Some people doubt the constitutionality of these laws, and the issue of greenmail remains far from settled.

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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.

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.

Contents 1 Tactic 2 Examples 3 Prevention 4 See also 5 External links 6 Notes

Tactic

Corporate raids aim to generate large amounts of money by hostile takeovers of large, often undervalued or inefficient (i.e. non-profit-maximizing) 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.

While 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 seen their ranks reduced or eliminated had the hostile takeover successfully gone through.

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.

The St. Regis Paper Company provides an example of greenmail. When an investor group led by Sir James Goldsmith acquired 8.6% stake in St. Regis and expressed interest in taking over the paper concern, the company agreed to repurchase the shares at a premium. Goldsmith's group acquired the shares for an average price of $35.50 per share, a total of $109 million. It sold its stake at $52 per share, netting a profit of $51 million. Shortly after the payoff in March 1984, St. Regis became the target of publisher Rupert Murdoch. St Regis turned to Champion International and agreed to a $1.84 billion takeover. Murdoch tendere his 5.6% stake in St. Regis to the Champion offer for aprofit. (Source: J. Fred Weston, Mark L.Mitchell J. Harold Mulherin -- Takeovers, Restructuring, and Corporate Governance: page 529)

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.

See also

• Economics
• Industrial organization
• Mergers and acquisitions
• Microeconomics
• Piracy

External links

• Investopedia

Notes

1. ^ IRS Form 8725 : Excise Tax on Greenmail

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