Greenmail

Updated on May 23, 2024
Article byWallstreetmojo Team
Edited byAaron Crowe
Reviewed byDheeraj Vaidya, CFA, FRM

Greenmail Definition

Greenmail is an intentional purchase of a substantial number of shares in an entity with the ultimate objective of threatening it with a hostile takeover, which usually forces the owners to repurchase the shares at a premium. This helps the corporates generate huge funds with hostile takeover threats.

Greenmail Definition

You are free to use this image on your website, templates, etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Greenmail (wallstreetmojo.com)

The target firm is forced to buy its stock at an increased price to ward off a corporate raider. It is blackmail that gives the corporate raider a good profit by just creating a takeover threat. In the case of mergers and acquisitions, this payment is made to stop the takeover bid.

Key Takeaways

  • Greenmail refers to an intentional buying of a substantial number of shares in an entity to threaten it with a hostile takeover that forces typically the owners to repurchase the shares at a premium.
  • It is a profit-making strategy where the investor purchases considerable stakes in the target company and then threatens it with a hostile takeover. Moreover, it creates an environment where the target company forces them to buy back their shares at a compelling premium.
  • It is like blackmail, where threats are made to obtain benefit and profit. Then, this money is paid to another company to end the aggressive behavior.

Greenmail Explained

The greenmail strategy is a profit-making method wherein the investor buys large stakes in the target company and then threatens the company with a hostile takeover. It creates a situation where the target company forces them to buy back their shares at a significant premium, which acts as a greenmail defense.

It is a very challenging situation for the target company. They are forced to decide between being taken over and paying a high premium to buy back their shares from the corporate raider. In most circumstances, the target firm pays the premium price and buys back its shares over a hostile takeover. It is like blackmail, where the raider asks for a ransom to release the control of shares over the target company. One should remember that the raider has no intention of buying the target company, but it just wants to profit from the costly premium it demands from the target company.

On accepting this payment, the raider will stop harassing the target company for takeover and cannot buy any shares of the target company for a specified period. Though the target company gets back its control over its claims, it may have an additional debt of a considerable amount that it has taken to finance the process, which acts as a greenmail defense. The term derives from the combination of blackmail and greenbacks (dollars).

Financial Modeling & Valuation Courses Bundle (25+ Hours Video Series)

–>> If you want to learn Financial Modeling & Valuation professionally , then do check this ​Financial Modeling & Valuation Course Bundle​ (25+ hours of video tutorials with step by step McDonald’s Financial Model). Unlock the art of financial modeling and valuation with a comprehensive course covering McDonald’s forecast methodologies, advanced valuation techniques, and financial statements.

Greenmail Explained in Video

 

Steps

Let us look at the greenmail meaning, with the help of a diagram.

You are free to use this image on your website, templates, etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Greenmail (wallstreetmojo.com)

  • Purchase – A corporate raider or an investor gets hold of a significant stake in the target company by purchasing its shares from the open market.
  • Struggle – Threaten the target company over a hostile takeover. Still, they offer to sell the acquired shares to the target company at a premium price, much above the market value. The raider also makes a promise not to harass the target company by repurchasing the shares of the target company.
  • Sale – The corporate raider sells its share at a higher price. The target company utilizes the shareholder money to pay the premium price for buyback. As a result, the target company leaves with considerable debt and reduced value. In comparison, the raider makes a handsome profit.

Examples

Let us look at some greenmail examples to understand the concept.

  • American investor, Carl Icahn, bought an approximately 9.9% stake in Saxon Industry at an average price of $7.21 per share.
  • Saxon Industries feared he might go for a hostile takeover and further increase his stake.
  • Saxon Industries offered to buy back Carl Icahn’s stake at an average price of $10.50 per share.
  • It represented a premium of 45% of his purchase price, making Icahn a handsome profit.

Effective Measures By The Target Company

During these situations, the target companies have two options.

  • The first option is that the target company can take no action and allow the hostile takeover.
  • Secondly, the target company can pay a premium price above the market value to avoid hostile takeovers and buy back its shares.

Let us understand the greenmail meaning from the case mentioned below. Suppose X Co. buys 30% shares of Y Co. and then threatens X Co. with a takeover. The management of company Y Co. decides to buy back the shares at a premium price to avoid the takeover bid. After this greenmail, X Co. makes a considerable profit from the resale of shares at the premium price. Still, Y Co. makes a significant loss and leaves with additional debt. The above situation falls under some  greenmail examples.

Although greenmail strategy exists in various forms, the state has implemented regulations that make it quite difficult for companies who plan to repurchase shares from short-term investors above the market price. In 1987, the Internal Revenue Service (IRS) introduced an excise tax of 505 on the profits from greenmail. The companies also have incorporated different defense mechanisms known as poison pills to keep such investors at bay from threatening hostile takeovers. It does not always mean hostile takeover bids, but it may often lead to proxy contests, which eventually can affect the management and operations of the company.

Frequently Asked Questions (FAQs)

Is Greenmail legal?

A New York statute forbids a New York corporation from again buying more than 10% of its stock from a shareholder at a more price than market value (unless approved in a majority vote).

Is Greenmail safe?

An excessive amount of abusive accounts have recently been introduced from greenmail.net, which one may classify as a medium-risk profile. Moreover, checks are needed to validate users from this domain.

What is an anti-greenmail provision?

An anti-greenmail provision is a provision within a corporate charter that prevents the company’s Board of Directors from making Greenmail payments which a corporation makes to buy out a shareholder’s stock at an inflated cost.

Who is greenmail.net?

Greenmail.net is a well-known email service used for personal account creation. Unfortunately, many abusive accounts have been introduced from greenmail.net, which they consider a medium-risk profile. Therefore, further checks must be required to verify users from the domain.

This article is a guide to Greenmail and its definition. We explain it along with examples, steps and effective measures taken by the target company. You may learn more about M&A from the following articles: –

Reader Interactions

Leave a Reply

Your email address will not be published. Required fields are marked *