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Greenmail - how does it make sense?

Hi all - good to be back! :D

I was reading up on takeover defenses, and greenmail is just something I don't really get.

Definition: Greenmail is a post-offer defence whereby the target company buys back the shares from the acquirer with company cash, usually at a premium. It then goes on to say that in essence the target pays the acquirer to go away.

...

Er, what the frak? How does that kind of defence even work? Paying someone to go away sounds fundamentally flawed. Can anyone add to this?
This is CFA!!!

Comments

  • Welcome back @fabian

    Why do you say paying someone to leave you alone is fundamentally flawed? They made a nice profit out of it and didn't have to go through the headache of having to deal with all the management headaches that come with a merger.

    Actually if I recall properly to discourage this practice the US slapped on extra taxes on this very kind of profit.
    If words can be lethal weapons, I must provide them with an arsenal.
  • Wow - a free masterclass in greenmail. Thanks!

    @Diya the part I didn't understand was from the target's perspective, and sort of what @Zee touched on, if they paid acquirers off, what's to stop everyone from doing the same? And surely if you're paying someone off to not do something in a free market, something is off somewhere...
    This is CFA!!!
    Zee
  • edited April 2013
    @fabian like I mentioned I believe the profits earned from such a strategy is taxed at a much higher rate.

    From my M&A class in university the proffesor always told us that M&A is about more ego/image then economics and earning a profit. Most high profile mergers did not end well - think HP and PALM. From and outside perspective it was really hard to argue that the premium HP paid for PALM made any business sense or economical sense or even common sense. But the deal went through and look what happened...

    And the image of being a corporate raider is generally a negative one.

    Also from the acquirer's point of view they can lose a pretty penny if they aren't paid a premium from the target and the target rather just dilutes the shares or they have another hidden card that can drive down stock prices.
    If words can be lethal weapons, I must provide them with an arsenal.
    fabian
  • It kind of makes more sense now that it's put in real-life examples....
    This is CFA!!!
  • @fabian I think when it comes to M&A you have to realize that the management's first and foremost priority is to save their job and that can result in weird decisions.
    If words can be lethal weapons, I must provide them with an arsenal.
    fabian
  • @diya Yep that makes sense alright!
    This is CFA!!!
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