Greenmail refers to the practice in corporate finance where a company buys back its shares at a premium from a hostile investor who has acquired a significant stake in the company, in exchange for the investor’s agreement to not pursue a takeover. This tactic, which derives its name from the combination of ‘green’ (money) and ‘blackmail’, was particularly prominent in the United States during the 1980s.
Historical Context
Greenmail became a notable practice in the late 20th century, particularly during the takeover boom of the 1980s in the United States. During this period, many corporate raiders and investment firms would accumulate substantial stakes in companies, threatening hostile takeovers unless their shares were bought back at a considerable premium.
Key Events
- 1980s Takeover Boom: Marked by numerous high-profile greenmail incidents.
- 1984 - Carl Icahn and TWA: Corporate raider Carl Icahn accumulated a substantial stake in TWA and forced the company to repurchase his shares at a premium.
- 1985 - Texaco and Getty Oil: Texaco paid greenmail to Pennzoil to drop a lawsuit concerning a merger agreement with Getty Oil.
Types/Categories
- Hostile Greenmail: Involves aggressive strategies where the raider threatens a takeover.
- Defensive Greenmail: Implemented by a company as a defense mechanism to prevent unwanted takeovers.
Detailed Explanations
Greenmail can be understood by dissecting its mechanism and implications:
Process
- Acquisition of Shares: The raider purchases a significant stake in the company.
- Threat of Takeover: The raider threatens to initiate a hostile takeover or to create instability within the company.
- Negotiation: The company’s management negotiates to repurchase the shares at a premium price.
- Share Repurchase: The company buys back the shares, and the raider exits with a profit.
Mathematical Model
Let’s represent the transaction mathematically:
- Let \( P_m \) be the market price per share.
- Let \( P_p \) be the premium price per share paid by the company to repurchase the shares.
- Let \( N \) be the number of shares acquired by the raider.
The premium paid by the company can be calculated as:
Example Calculation
Assume a raider buys 1 million shares of Company XYZ at a market price of $50 per share, then negotiates a repurchase price of $70 per share.
Importance and Applicability
Greenmail has several implications in corporate finance:
- Corporate Governance: Raises questions about managerial accountability and the ethicality of using company resources to fend off raiders.
- Shareholder Value: Can protect existing shareholders from hostile takeovers but also dilute value due to high repurchase premiums.
- Regulatory Reforms: Led to changes in laws and corporate practices to limit greenmail activities.
Considerations
- Legal: Legal constraints and anti-greenmail provisions can vary by country and region.
- Ethical: Ethical debates center around the morality of coercing companies into paying premiums.
- Strategic: It can be a double-edged sword, providing short-term stability while potentially harming long-term shareholder interests.
Related Terms
- Hostile Takeover: An acquisition in which the target company’s management opposes the purchase.
- Poison Pill: A strategy used by companies to prevent or discourage hostile takeovers.
- Corporate Raider: An investor conducting hostile takeovers for profit.
Interesting Facts
- Greenmail is largely illegal today in the United States due to reforms in corporate governance.
- Notorious Raiders: Figures like Carl Icahn and T. Boone Pickens became infamous for their greenmail tactics.
Famous Quotes
- “Greenmail has the distinction of being a weapon that both attackers and defenders detest.” – Anonymous
Proverbs and Clichés
- “Money talks.”
- “Every man has his price.”
FAQs
Is greenmail legal today?
Why would a company pay greenmail?
References
- “Corporate Governance: Principles, Policies, and Practices” by Bob Tricker.
- “The Barbarians at the Gate” by Bryan Burrough and John Helyar.
- U.S. Securities and Exchange Commission (SEC) Regulations on Share Repurchases.
Summary
Greenmail is a controversial tactic in the corporate world involving the purchase of a significant stake in a company and subsequent sale at a premium to prevent a hostile takeover. Its historical prominence, particularly in the 1980s in the U.S., and its implications for corporate governance, ethical debates, and regulatory reforms make it a significant topic in the study of corporate finance.
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