Greenmail

Greenmail is a colorful term for a practice that's essentially a form of corporate blackmail. It happens when an investor or a group buys a large number of a company's shares on the open market and then threatens a hostile takeover or a proxy fight. To fend off the unwanted suitor, the target company's management agrees to buy back the shares from the aggressor at a significant premium—a price well above the current market value. The would-be raider pockets a handsome profit and walks away, leaving the other shareholders to foot the bill. The term itself is a clever play on “blackmail” and “greenback” (a slang term for the U.S. dollar), highlighting the financial nature of the threat. While it was a hallmark of the go-go 1980s, it's now widely seen as a predatory tactic that enriches a single activist investor at the expense of the company and its long-term shareholders.

Imagine a corporate drama unfolding in three acts. The process is surprisingly straightforward, though the implications are complex.

1. Act 1: The Accumulation. A corporate raider, an investor who specializes in these kinds of aggressive moves, begins quietly buying up a large block of a target company's stock. Their goal is to acquire a significant enough stake (e.g., 5-10%) to be a credible threat to the existing management.
2. Act 2: The Threat. Once the stake is secured, the raider makes their presence known. They might publicly announce their intention to take over the company, replace the board of directors, or force a major restructuring. This creates panic and uncertainty within the company.
3. Act 3: The Payoff. The company's board, desperate to maintain control and avoid a messy and expensive takeover battle, enters into negotiations. They offer to buy back the raider's shares at a price substantially higher than what the raider paid and what the shares are currently trading for. The raider accepts the “greenmail” payment, makes a quick and massive profit, and agrees to leave the company alone for a specified period.

The 1980s were the golden age of greenmail, and one of the most famous examples involved The Walt Disney Company. In 1984, financier Saul Steinberg acquired a 6.3% stake in Disney and threatened a hostile takeover and proxy fight to break the company up. Disney’s management, led by Ron W. Miller, was terrified of losing control of the beloved entertainment empire. The solution? They paid Steinberg a massive greenmail payment. Disney bought back his shares for $325.5 million, handing Steinberg a cool profit of about $60 million for just a few months of “work.” To finance the payment, Disney had to take on significant debt, which weakened its financial position. The episode was a public relations disaster and ultimately contributed to Miller being replaced by a new management team later that year. This story, along with the exploits of other famous raiders like Carl Icahn and T. Boone Pickens, cemented greenmail's notorious reputation.

Technically, greenmail isn't illegal. It's a private transaction between a company and one of its shareholders. However, its controversial nature has led to measures designed to curb it. In the United States, for instance, the Internal Revenue Service (IRS) imposes a hefty 50% excise tax on greenmail profits, making the practice far less attractive than it once was. Furthermore, many companies have adopted their own defenses.

For the average shareholder, greenmail is almost always bad news. Here’s why:

• Value Destruction: The money used to pay the greenmailer comes directly from the company's treasury. This is cash that could have been used to fund growth, pay dividends, or conduct share buybacks that would benefit all shareholders. Instead, it’s used to enrich a single, aggressive investor.
• Management Entrenchment: Critics argue that management pays greenmail not to protect the company, but to protect their own jobs. By paying off a threat, they entrench themselves without addressing the underlying issues (like poor performance) that may have made the company a target in the first place.
• Defensive Measures: To prevent greenmail, companies may enact “anti-greenmail provisions” in their corporate charters, which often forbid paying a premium to a specific shareholder. Another common defense is the poison pill, a strategy that makes a hostile takeover prohibitively expensive.

From a value investing standpoint, greenmail is the antithesis of a sound investment strategy. Value investors, following the philosophy of Benjamin Graham and Warren Buffett, seek to be long-term partners in a business. They buy shares in wonderful companies at fair prices and hold them, allowing the company's intrinsic value to grow over time. Greenmail is a short-term, opportunistic tactic that often damages a company's long-term prospects by draining its resources. A true value investor would look at a company paying greenmail and see a red flag: a management team willing to destroy shareholder value to save their own skin. While the raider's argument is sometimes that they are shaking up a complacent and inefficient management team, the greenmail payoff is a resolution that benefits only the raider, not the business itself or its committed owners.