Greenmail

Greenmail

Greenmail or greenmailing refers to a legal business practice in a public stock market where one firm takes advantage of another firm by means of a falsely construed takeover.

Origin

The term is a neologism combining the terms greenback and blackmail, invented by journalists and commentators who saw the practices of corporate raiders as a form of blackmail. The target company is financially held hostage, and is legally forced to pay the greenmailer to go away.

Tactic

Greenmailing is a variation on the corporate raid or hostile takeover. The greenmailer commonly targets a publicly traded company that is cash rich but often undervalued, with large assets and possibly a solid customer base. Other targets are companies that are simply inefficient. In any case, the greenmailer seeks to avoid target companies that have implemented poison pills. The greenmailer isn't really interested in the business of the company. It doesn't want to own the company, improve it, or further build it up. It will, if forced to acquire the target, sell its parts off piecemeal, which can bring a greater profit than selling the whole target. This is called asset stripping and involves replacing management and firing employees. However, if a proper greenmail occurs, the greenmailer merely secures a significant stake in the target company. The greenmailer can offer to end the threat to the target company by selling its share back at a substantial premium. The target or "mark" can also go private with the same results: a profit to the greenmailer. The greenmailer gets away with no oversight, low overhead, and its profits. The target is left poorer and without the assets that attracted the raid in the beginning.

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 stock position 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, who 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.

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) [ [http://www.irs.gov/pub/irs-pdf/f8725.pdf IRS Form 8725 : Excise Tax on Greenmail] ] have all made greenmail far less common since the early 1990s.

See also

* Economics
* Industrial organization
* Mergers and acquisitions
* Microeconomics

Notes


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Look at other dictionaries:

  • greenmail — green·mail / grēn ˌmāl/ n [green (money) + mail (as in blackmail )]: the practice of buying enough of a company s stock to threaten a hostile takeover and reselling it to the company at a price above market value; also: the money paid for such… …   Law dictionary

  • greenmail — green mail n. (Finance) The act, performed by a publicly traded corporation, of paying a corporate raider to give up a takeover attempt, by buying the shares of stock he owns; also, the threat posed by corporate raiders to take over a company… …   The Collaborative International Dictionary of English

  • greenmail — [grēn′māl΄] n. Informal the buying of a large amount of a company s stock in anticipation that the management, fearing that the buyer will gain control, will buy it back at a premium over the market price greenmailer n …   English World dictionary

  • Greenmail — Situation in which a large block of stock is held by an unfriendly company, forcing the target company to repurchase the stock at a substantial premium to prevent a takeover. The New York Times Financial Glossary * * * greenmail green‧mail… …   Financial and business terms

  • greenmail — The holding of a large block of stock of a target company by an unfriendly company, with the object of forcing the target company to repurchase the stock at a substantial premium to prevent a takeover. Bloomberg Financial Dictionary The situation …   Financial and business terms

  • greenmail — [[t]gri͟ːnmeɪl[/t]] N UNCOUNT Greenmail is when a company buys enough shares in another company to threaten a takeover and makes a profit if the other company buys back its shares at a higher price. [mainly AM, BUSINESS] Family control would… …   English dictionary

  • greenmail — n. a money making scheme wherein a very wealthy person buys a large number of shares of a company, threatens to take control of the company, and then offers to sell the stock to the company at an exorbitant price in lieu of a takeover.… …   Dictionary of American slang and colloquial expressions

  • greenmail — noun Date: 1983 the practice of buying enough of a company s stock to threaten a hostile takeover and reselling it to the company at a price above market value; also the money paid for such stock • greenmail transitive verb • greenmailer noun …   New Collegiate Dictionary

  • greenmail — The purchase of a large block of shares in a company, which are then sold back to the company at a premium over the market price in return for a promise not to launch a bid for the company. This practice is not uncommon in the USA, where… …   Accounting dictionary

  • greenmail — greymail The purchase of a large block of shares in a company, which are then sold back to the company at a premium over the market price in return for a promise not to launch a bid for the company. This practice is not uncommon in the USA, where …   Big dictionary of business and management

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