Greenmail Explained
Greenmail is a strategy where an investor purchases a significant amount of a company’s shares and then pressures the company’s management to buy back the shares at a higher price than the market rate. This often involves a promise from the investor not to pursue a hostile takeover bid. While the practice raises ethical questions, as it can be seen as a form of corporate extortion, it can also lead to substantial profits for the greenmailer.
Examples of Greenmail
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American Vulture Funds: In the 1980s, several American corporate raiders, like Carl Icahn and T. Boone Pickens, became notorious for greenmailing various companies. These investors would buy large stakes in companies, threaten hostile takeovers, and then agree to sell their shares back to the company at a premium.
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MGM and Kirk Kerkorian: In 1986, investor Kirk Kerkorian attempted to take over MGM. Although he initially purchased a significant amount of MGM’s stock, the company eventually bought back Kerkorian’s shares at a premium to avoid the takeover.
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Walt Disney Company and Saul Steinberg: In 1984, Saul Steinberg’s Reliance Group Holdings amassed a significant stake in Disney. To thwart a takeover bid, Disney repurchased Steinberg’s shares at a substantial premium.
Frequently Asked Questions (FAQs)
Q1: Is greenmail legal?
- A1: Greenmail is legal in many countries, including the United States. However, some jurisdictions have implemented laws and regulations to curb the practice due to its perceived unethical nature.
Q2: Why would a company agree to greenmail?
- A2: Companies may agree to greenmail to avoid a hostile takeover, maintain control, or avoid potential disruptions to their business operations and strategic plans.
Q3: How does greenmail differ from a regular share buyback?
- A3: A regular share buyback is an effort by a company to repurchase its shares on the open market to reduce the number of outstanding shares, potentially increasing the value of remaining shares. Greenmail specifically involves buying back shares from a party threatening a takeover, often at a premium price.
Q4: What are the ethical concerns associated with greenmail?
- A4: Ethical concerns include the perception that greenmail allows investors to coerce companies into paying a premium without contributing substantive value. It is also viewed as a way to extract corporate resources for personal gain.
Q5: Can greenmail impact a company’s stock price?
- A5: Yes, the announcement of a buyback, especially at a premium, can influence a company’s stock price. While it might offer short-term gains, it could also reflect poorly on management, leading to long-term repercussions.
Related Terms
- Hostile Takeover: An acquisition attempt by an investor or company against the wishes of the target company’s management and board of directors.
- Poison Pill: A defense strategy used by companies to prevent or discourage hostile takeover attempts.
- Leveraged Buyout (LBO): The acquisition of a company using a significant amount of borrowed money to meet the cost of acquisition.
- Share Buyback: A practice where a company purchases its shares from the open market, reducing the number of outstanding shares.
Online References
- Investopedia: Greenmail
- The Balance: What is Greenmail?
- SEC: Hostile Takeovers
- Harvard Law School Forum on Corporate Governance and Financial Regulation
Suggested Books for Further Studies
- “Corporate Governance” by Robert A. G. Monks and Nell Minow
- “Take On the Street” by Arthur Levitt
- “Barbarians at the Gate: The Fall of RJR Nabisco” by Bryan Burrough and John Helyar
- “Mergers, Acquisitions, and Corporate Restructurings” by Patrick A. Gaughan
Accounting Basics: “Greenmail” Fundamentals Quiz
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