Greenmail
It arose as a result of the high number of business mergers that happened in the 1980s
What Is Greenmail?
The name "greenmail" is derived from the words "blackmail" and "greenbacks". It arose as a result of the high number of business mergers that happened in the 1980s. During that time, it was thought that certain corporate raiders were initiating takeover bids only for the sake of profit.
Because of rules, restrictions, tariffs, and anti-greenmail measures, it is significantly less popular nowadays.
It is still used informally in various ways, but multiple federal and state restrictions have made it considerably more difficult.
Furthermore, to dissuade activist investors from mounting hostile takeover bids, firms have implemented numerous defense measures known as poison pills.
Following a surge in the 1980s, some states in the United States enacted legislation prohibiting businesses from paying it.
A New York legislation, for example, prevents a business from buying back more than 10% of its own stock from a shareholder at a price greater than market value.
Investors who utilize this strategy must erase any earnings from their accounts in Ohio and Pennsylvania, according to state law.
In addition, the profit created is subject to a 50 percent excise tax under Section 5881 of the Internal Revenue Code. The excise tax, however, is readily evaded because the practice is not well-defined.
How Does Greenmail Work?
GreenMail refers to a tactic used in the corporate world, particularly during hostile takeover attempts.
GreenMail is somewhat analogous to a person paying ransom to a kidnapper, where the "kidnapped" is the company's own stock. The term "GreenMail" combines "green" (referring to money) and "blackmail."
It paints a picture of complex maneuvers and financial gambits. But what exactly is this strategy, and how does it play a role in the corporate game?
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An investor, often known as a "business raider," buys a big interest in a firm on the open market.
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An investor or corporation threatens a hostile takeover but then offers to sell the target firm's shares back at a higher price (above market value). When the target firm repurchases the shares, the raider agrees to leave the target company alone.
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The “ransom” is paid with money from the target company's shareholders.
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The value of the target firm is diminished, and the greenmailer makes a substantial profit.
In the 1980s, the practice was quite popular. Companies paid about $4 billion between April 1983 and April 1984.
Vulture capitalist Carl Icahn is widely recognized as one of the most notorious greenmailers of all time. He would take positions in public firms and demand radical changes in the leadership and management practices of such organizations.
Targets frequently gave him "greenmail" money in exchange for him stepping away from them.
Challenges and Benefits Associated with Greenmail
On one hand, it presents businesses with certain tactical advantages, while on the other, it poses distinct challenges that can influence corporate decision-making.
a) Challenges Faced by Target Companies
It offers two options that create a difficult issue for target organizations:
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Allow their firm to be taken over by doing nothing.
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Pay a hefty price to avert a hostile takeover.
Target firms routinely purchase back shares at a premium to prevent a hostile takeover. Company A, for example, acquires 20% of Company B's stock and then threatens a takeover.
Without any other choices, Company B's management buys back the shares at a premium to prevent being taken over.
Through the selling of the shares at a premium to Company B, Company A makes a big profit, while Company B loses a significant amount of money.
b) Benefits
Despite its nefarious reputation, it can be viewed as a free-market remedy to genuine shareholder conflicts. A corporate raider may honestly think that the company's resources are underutilized.
One option may be to sell assets for a profit to other companies that can put them to greater use. The corporate raider, other shareholders, and society as a whole may benefit from this arrangement.
The firm's management, on the other hand, may not agree with the corporate raider that others would better use its assets. This serves as a kind of free-market proof that the assets should stay in the firm's possession.
By selling shares instead of assets, the corporate raider avoids the earnings that may be realized by selling assets.
This does not occur if the raider can earn more money selling the assets since it would be unprofitable and inefficient. As a result, it is only used when it is advantageous in this context.
Real-World Example of Greenmail
GreenMail, a term frequently bandied about in boardrooms and business schools, takes on a whole new dimension when viewed through the lens of actual corporate occurrences.
A) Example #1
In the 1980s, Sir James Goldsmith was a well-known business raider. He was the mastermind of two high-profile campaigns, one against St. Regis Paper Company and the other against Goodyear Tire and Rubber Company (GT). Goldsmith made $51 million with his St. Regis business and $93 million from his two-month-long Goodyear raid.
Goldsmith bought an 11.5 percent interest in Goodyear in October 1986 for $42 a share on average.
He also filed plans with the Securities and Exchange Commission to fund a takeover of the firm (SEC). He intended to sell off all of the company's assets and save the tire business as part of his strategy. This approach did not go down well with Goodyear management.
To counter Goodyear's opposition, Goldsmith suggested selling his stock back to the corporation for $49.50 per share. The ransom or the goodbye kiss are two terms used to describe this sort of strong-arm request.
Goodyear eventually accepted and repurchased 40 million shares from owners at $50 a share, for a total cost of $2.9 billion. Following the buyout, the price of Goodyear's stock dropped to $42.
B) Example #2
Carl Icahn bought a 9.9% interest in Saxon Industry for $7.21 a share. Saxon understood there was a chance the investor might purchase additional stock and increase his interest in the firm. Carl Icahn's hostile takeover threat was inevitable in such a situation.
To prevent this from happening, the company repurchased Icahn’s 9.9% ownership in the company for a stunning $10.50 per share. This amounted to a premium payment of 45 percent of the activist investor's total purchase price.
Anti-Greenmail Provision
This provision is a section in a corporation's charter that forbids the board of directors from accepting greenmail payments.
Rules can dissuade corporate raiders from looking for a fast buck by prohibiting a company's board of directors from making these payments. A type of investor known as a raider grew in popularity in the 1980s.
These well-heeled investors would buy inexpensive businesses and then controversially dismantle them to determine their worth. Rather than working to improve the target company's long-term prospects, the objective was to make a rapid profit.
This became more common as a result of this type of opportunistic activity, as well as the reality that many firms lacked adequate defenses against hostile takeovers.
The goal is to get the target firm to buy the shares back at a higher price. It is similar to blackmailing, with the exception that the green represents money.
In some places, laws eliminate this contentious activity, barring a board from repurchasing firm shares at a premium from a hostile investor seeking a rapid payment rather than a true commercial partnership.
In most of these laws, an identical premium payment must be provided to all shareholders if a premium payment is made to a greenmailer.
In several anti-greenmail regulations, there is also another alternative. Rather than paying a premium to the hostile party and all shareholders, the provision demands a shareholder vote and majority approval for any one-time payment.
Advantages and Disadvantages of Anti-Greenmail Provisions
It measures offer shareholders additional authority. Management frequently argues that it should not be barred from negotiating a transaction to buy out a shareholder at a premium if it feels it is in the company's best interests.
Others claim that board members who support paying greenmail are driven by self-interest, as they would almost certainly lose their jobs if the company is taken over.
This payment deprives a corporation of funds that may otherwise be utilized to expand its operations. Because a large number of business assets are at stake, it seems only reasonable that shareholders have a say.
This is made feasible by anti-greenmail regulations. They do, however, enhance the likelihood that a corporate raider may seek even more potentially destructive ways to earn a reasonable return on their investment.
A raider, for example, may persuade the board to sell the company's “crown jewels”, further diminishing shareholder value. Anti-greenmail laws or other anti-takeover measures, on the other hand, may dissuade raiders from attempting a hostile takeover.
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