What is Greenmail?

Greenmail occurs when a business buys back shares from a hostile suitor at a premium to their market price, thereby avoiding the risk of a hostile takeover. The potential acquirer pockets a significant profit, while the target company finds itself in a worse financial position because it was forced to pay cash and incur debt to make the greenmail payment. As part of the payment, the hostile suitor agrees not to buy the company’s stock for a certain period of time. The outcome is that company management remains in charge, so the transaction is an anti-takeover mechanism. A firm can incorporate various poison pill features into its corporate documents in order to make hostile takeovers more difficult for someone to achieve.

The greenmail name comes from the amount of money (greenbacks) required to make the hostile party go away. An excise tax on greenmail profits that was imposed by the Internal Revenue Service in 1987 has resulted in a sharp decline in the number of greenmail payments having been made in recent years.

Advantages of Greenmail

From the perspective of the potential acquirer, the main advantage of greenmail is that it can generate a quick profit, without having to go through the extended process of actually having to acquire the target company and then enhance its value. A less targeted advantage is that the threat of greenmail can put pressure on the target company’s management to take whatever steps are needed to enhance the share price; this provides value to anyone who owns shares in the company.