Greenmail, Pacman

Greenmail

Greenmail is the practice of buying a voting stake in a company with the threat of a hostile takeover to force the target company to buy back the stake at a premium. In the area of mergers and acquisitions, the greenmail payment is made in an attempt to stop the takeover bid. The target company is forced to repurchase the stock at a substantial premium to thwart the takeover.

Like blackmail, greenmail is money that is paid to an entity to make it stop an aggressive behavior. In mergers and acquisitions, it is an anti-takeover measure where the target company pays a premium, known as greenmail, to purchase its own stock shares back (at inflated prices) from a corporate raider.

Once the raider accepts the greenmail payment, generally it agrees to stop pursuing the takeover and not to purchase any more shares for a specified number of years. The term “greenmail” stems from a combination of blackmail and greenbacks (dollars). The great number of corporate mergers that occurred during the 1980s led to a wave of greenmailing. During that time, it was suspected that some corporate raiders initiated takeover bids to make money through greenmail with no intention of following through on the takeover.

Greenmail Outlawed

Although it still occurs in various forms, federal and state regulations have made it much more difficult for companies to repurchase shares from short-term investors above market price. In 1987, the Internal Revenue Service introduced an excise tax of 50% on any greenmail profits. In addition, companies have introduced various defense mechanisms referred to as poison pills to deter activist investors from making hostile takeover bids.

Pacman

A high-risk hostile takeover defense in which the target firm tries to take over the company that has made the hostile bid by purchasing large amounts of the would-be acquirer’s stock. The Pac-Man defense is supposed to scare off the would-be acquirer, which doesn’t want to be taken over itself. The target may sell off its own assets or borrow heavily in order to acquire enough of the acquirer’s stock to prevent the takeover.

The Pac-Man defense does not always work, but it was first successfully used in 1982 by Martin Marietta to prevent a takeover by Bendix Corp. In 1988, American Brands used it successfully against E-II, and TotalFina used it in 1999 to prevent a takeover by Elf Aquitaine. Some analysts speculated that Cadbury would try to use the Pac-Man defense against Kraft in 2009. 

The Pac-Man defense may be used alone or in conjunction with other takeover defenses, such as the white knight.