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Hostile Takeover Defense Strategies: Greenmail Defense

Hostile Takeover Defense Strategies: Greenmail Defense


Published by BSIC on 4 April 2021

Greenmail Defense

The Greenmail defense refers to the target company buying back shares of its own stock from a takeover bidder who has already acquired a substantial number of shares in pursuit of a hostile takeover. It is a costly defense, as the target company is forced to pay a substantial premium over the current market price in order to repurchase the shares. In exchange for receiving the premium and profit, the raider agrees to halt attempts at a hostile takeover. Although this strategy is legal, the acquirer is effectively blackmailing the target company, in that the target must pay the acquirer a premium, through the share buybacks, in order to persuade it to cease its takeover attempt.

How does it work?

  1. Company A acquires a large stake in company B by purchasing shares from the open market.

  2. Company A threatens a hostile takeover but offers to sell the shares back to the target company at a premium price (above market value) and promises to leave the target company alone upon the target company repurchasing the shares.

  3. Company B uses shareholder money to pay the ransom but company B’s value is reduced, and Company A walks away with a significant profit.

One famous example involved Goodyear Company and Sir James Goldsmith. In 1986, Sir James Goldsmith held an 11.5% stake (at an average of $42.20 per share) in Goodyear Company and threatened to take over the company for $4.7bn ($49 per share). In response, Goodyear agreed to repurchase the existing shares from Sir James for $49.50 per share ($620.7m), provided that Sir James refrained from purchasing any Goodyear stock for 5 years. In the end, Sir James made about $93m in profit. Additionally, to prevent another takeover attempt in the future, Goodyear offered to repurchase 40 million shares, with 109 million shares outstanding, at $50 per share, in an open offer to all shareholders. Ultimately, the defense strategy cost Goodyear more $2.6bn.

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Harvey Yan


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