Concept: Greenmail

#19

What?

• Blackmail + Greenbacks (US Dollars)
• Refers to when a raiding company holding a large chunk of stock forces the target company to buy it back at a premium to avoid a hostile takeover
• The target company is coerced into making a greenmail payment as a defensive measure to stop the takeover bid
• Aka bon voyage bonus

Concept

• A rise in corporate mergers during the 1980s led to the inception of greenmail
• Corporate raiders would initiate takeover bids with no intention of seeing it through
• Critics see greenmail as a predatory practice much like extortion
• Some instead see it as a free-market solution to shareholder conflicts

Examples

• James Goldsmith earned more than $90 million from the Goodyear Tire and Rubber Company in the 1980s (see notes for the full story)
• Occidental Petroleum paid $194 million greenmail to David Murdock in 1984
• David Murdock owned a 5% stake in the company and was a member of its board of directors after the company acquired IBP, Inc.
• Murdock owned 19% of IBP as well
• Disputes between Murdock and the CEO Armand Hammer led to a greenmail payment to Murdock of $40 per share
• Share price in the market was only $28.75
• Wall Street, the 1987 film, portrays greenmail tactics
• Fellow corporate raider Sir Larry Wildman refers to Gordon Gekko as "a two-bit pirate and a greenmailer"

Measures put in place

• Federal and state regulations act as deterrents
• Internal Revenue Service (IRS) introduced an excise tax of 50% on greenmail profits in 1987
• Companies introduced defence mechanisms such as poison pills to prevent investors from making hostile takeover bids
• Anti-greenmail provision (a special clause in a firm's corporate charter) prevents the board of directors from approving greenmail payments

Notes

What happened with James Goldsmith:

Sir James Goldsmith was a notorious corporate raider in the 1980s, minting millions via his orchestration of 2 high-profile greenmail campaigns. One was against St. Regis Paper Company from which he earned $51 million. The other venture that earned him $93 million in only 2 months was the Goodyear Tire and Rubber Company.

When Goldsmith acquired 8.6% stake in St. Regis and threatened a takeover, the company was coerced into repurchasing the shares bought at $35.50 by Goldsmith at a hefty premium of $52 per share. After suffering this loss in 1984, St. Regis fell prey to Rupert Murdoch, after which they sought refuge in Champion International,. agreeing to a takeover at $1.84 billion. Murdoch too received remuneration when he sold his 5.6% stake in St. Regis to the Champion.

In October 1986, Goldsmith purchased 11.5% stake in Goodyear at $42 per share while simultaneously planning a takeover of the company. He filed the takeover with the Securities and Exchange Commission (SEC), after which he proposed to sell off all assets of the company except its tire business. Facing obvious resistance from the Goodyear executives, Goldsmith then offered to resell his shares at $49.50 each. Goodyear lost $2.9billion in this transaction by buying back 40 million shares at $50 each. Unfortunately, Goodyear's stock price plunged to $42 after the buyback.