(FINANCE) when a corporate raider initiates a hostile takeover of an undervalued corporation with the intent of forcing the management to buy him off.
HOW IT WORKS
A corporate raider engaged in greenmail requires a takeover vehicle to launch a hostile takeover. The takeover vehicle is usually another corporation controlled by the raider, although in recent years ESOPs have been used (e.g., Tribune Corp., 2007). The vehicle buys up a lot of shares of the
target company's stock on the market, then announces it wants to acquire a controlling interest.
Management opposes the takeover bid. It can (a) challenge the legality of the takeover, (b) adopt a charter that makes it hard for the takeover vehicle to run the company it's proposing to buy (a poison pill), (c) seek another buyer that is more favorable (a white knight), or (d) borrow a ton of
money and buy so many shares that the stock price goes up.
The raider makes a
tender offer for the shares he doesn't own. If the
target picks (c) or (d), then the raider will probably make a huge amount of
money when he suddenly dumps all his shares on the market. His tender offer probably started a bidding
war with management, driving share prices to
something very high.
WHAT CAN
GO WRONG
The management can use (a) or (b) successfully, or it can use (e), viz., launch a hostile takeover bid of the
target vehicle. The raider can lose of lot of
money if a lot of shareholders have accepted his tender offer.
The most successful greenmail practitioner was T. Boone Pickens, who used
Mesa Petroleum (now Pioneer
Oil) to greenmail
six companies. Eventually he was ousted from his own company.
