What is "Greenmail" in Mergers & Acquisition Situation



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Hi Binny

I was confused with the concept of "GREENMAIL" that the managers use to protect their jobs in case of a hostile takeover by onother firm.
Can you please explain why the managers buy out the acquirer's current stake in the firm at much higher price than that was paid by the acquirer firm? Will it make them one of the stockholders of the firm?

Thanks & Regards
Sarthak


1 Answer(s)


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Sarthak, Greenmail is typically used by an acquirer in a hostile takeover scenario. In that case the acquirer will buy enough shares in the company to threaten the company of a takeover. Then the management will have to buy the shares back from the acquirer to prevent the takeover. And obviously the acquirer will sell the shares only at a mugh higher price since the company is at risk now of being acquired.

In the 1980's there were entire funds dedicated to just this kind of hostile takeovers......and threatening companies. Bonn Pickens is one of the most famous/infamous of such hostile takeover specialists.

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