Greenmail definition
Greenmail is a term used in corporate finance and mergers and acquisitions to describe a situation where a shareholder or investor threatens to take control of a company by acquiring a significant amount of its shares, unless the company agrees to buy back those shares at a premium price.
In other words, greenmail is a form of corporate raiding where an investor or shareholder uses the threat of a hostile takeover to extract a profit from the company. The term "greenmail" was coined because the investor is essentially "greenmailing" the company, or sending a threatening message to get what they want.
Here's an example of how greenmail might work:
- An investor, let's call them "Activist Investor," acquires a significant amount of shares in a company, say 20%.
- Activist Investor then sends a letter to the company's board of directors, stating that they intend to take control of the company unless the board agrees to buy back their shares at a premium price, say 50% above the current market value.
- The company's board, fearing a hostile takeover, agrees to the buyback, and Activist Investor sells their shares back to the company at the agreed-upon price.
Greenmail is often criticized because it can be seen as a form of extortion, where the investor is using the threat of a takeover to extract a profit from the company, rather than engaging in a genuine effort to improve the company's operations or management. However, some argue that greenmail can also be a useful tool for investors to pressure companies to improve their performance and increase shareholder value.