Greenmail

“Greenmail” is supposed to be a form of corporate-blackmail. Someone buys a large chunk of a company’s shares, threatens the company with a take-over and ends up getting bought out at a good profit.

Fact is, most of the time, the “greenmailers” do not take anything near a majority stake in the company (more like a 10% share). Fact is, that they threaten managements, not shareholders.

The typical situation is this: the company is in a situation where radically different action by its management can make a huge difference. Existing managements are often sentimentally attached to parts of their business, or to certain ways of doing things. At other times, managements know what they need to do, but simply procrastinate because its a tough decision; then they make a half-hearted effort, “hoping for the best”.

A typical investor, seeing such a management situation, would go elsewhere. Others, however, are more “activist” in their calls for change. The ones who earn the “green-mailer” title are the most ruthless of all. Their attitude is: it’s all dollars and cents. (e.g., T. Boone Pickens, Sir James Goldsmith, Carl Icahn, Kerkorian).

Recently, Carl Icahn bought a stake in AOL and he was on the business news every week explaining why the CEO of AOL (not AOL, but the CEO) was doing such a bad job. Kirk Kerkorian took a large stake in GM last year, and insisted on having a representative on the board. When he got that, the representative — Mr. York — began telling GM what they ought to be doing. This week, Mr. Kerkorian sent GM a letter suggesting that they should tie up with Nissan/Renault. (This might even imply bringing in Mr. Goshn of Nissan as some type of super-boss over Mr. Wagoner.)

In essence, what these so-called “raiders” do is to light a fire under management. Since they do not own a huge chunk, the real threat is that the other big holders — large mutual funds and pension funds — will agree with the raider’s reasoning. The big boys usually stay polite and let the “raider” hold the gun in public. The ultimate threat is not to the company, but to its top-management team: shape up or we’ll find someone else who can run the company.

Added  (Aug 19th): The above does not mean that shareholders should always welcome folks who want to take over the management of their companies.  The WSJ of Aug 19th 2006, had a page-1 story about some shareholders that fight back, with good reason. Here is how it works: a raider targets a firm where management could do better. Instead of selling for a price that is slightly higher than market, and letting the newcomers whip the company into shape, the raid can be a wake up call for shareholders. They can motivate management or bring in new managers and do great things for themselves. If you spruce up that jalopy, you might be able to keep more of the profit for yourself.