Friday, July 5, 2013

Greenmail Returns: Dell Versus Icahn

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Let's review our notes about greenmail, a subject that was very popular in the 70s and early 80s, and was used by Ivan Boesky , Carl Icahn and others to make fortunes for themselves just by being persistent and bothersome. In the pending Dell shareholder buyout, Carl has brought us back to the adventurous days of greenmail, bullying and masterful negotiation strategies -- the type often described in The Taking Command Blog. Greenmail is a legal variant on blackmail. It's a wonderful way to make money without (arguably) contributing any value whatsoever. Let's consult with Wikipedia, BP's occasional partner
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"Greenmail or greenmailing is the practice of purchasing enough shares in a firm to threaten a takeover, thereby forcing the target firm to buy those shares back at a premium in order to suspend the takeover.
The term is a neologism derived from blackmail and greenback as commentators and journalists saw the practice of said corporate raiders as attempts by well-financed individuals to blackmail a company into handing over money by using the threat of a takeover.

Corporate raids aim to generate large amounts of money by hostile takeovers of large, often undervalued or inefficient (i.e. non-profit-maximizing) companies, by either asset stripping and/or replacing management and employees. However, once having secured a large share of a target company, instead of completing the hostile takeover, the greenmailer offers to end the threat to the victim company by selling his share back to it, but at a substantial premium to the fair market stock price.

From the viewpoint of the target, the ransom payment may be referred to as a goodbye kiss. The origin of the term as a business metaphor is unclear. A company which agrees to buy back the bidder's stockholding in the target avoids being taken over. In return, the bidder agrees to abandon the takeover attempt and may sign a confidential agreement with the greenmailee, guaranteeing not to resume the maneuver for a period of time.

While benefiting the predator, the company and its shareholders lose money. Greenmail also perpetuates the company's existing management and employees, which would have most certainly seen their ranks reduced or eliminated had the hostile takeover successfully gone through.

Greenmail proved lucrative for investors such as T. Boone Pickens and Sir James Goldsmith during the 1980s. In the latter example, Goldsmith made $90 million from the Goodyear Tire and Rubber Company in the 1980s in this manner. Occidental Petroleum paid greenmail to David Murdock in 1984.

The St. Regis Paper Company provides an example of greenmail. When an investor group led by Sir James Goldsmith acquired 8.6% stake in St. Regis and expressed interest in taking over the paper concern, the company agreed to repurchase the shares at a premium.

Goldsmith's group acquired the shares for an average price of $35.50 per share, a total of $109 million. It sold its stake at $52 per share, netting a profit of $51 million. Shortly after the payoff in March 1984, St. Regis became the target of publisher Rupert Murdoch. St Regis turned to Champion International and agreed to a $1.84 billion takeover. Murdoch tendered his 5.6% stake in St. Regis to the Champion offer for a profit. (Source: J. Fred Weston, Mark L.Mitchell J. Harold Mulherin -- Takeovers, Restructuring, and Corporate Governance: page 529)"
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Here's a fresh media example culled courtesy of SmartBrief regarding the return of the greenmail tactic, Carl Icahn's weapon of choice. The results are usually 1) a wopping profit for Carl, who is paid a huge premium over their market value for the private repurchase of his shares just to "get him out of the way,"; 2) a management upheaval at the C-Suite and Director level within the targeted company (i.e., Dell), and 3) the target company is purchased or taken over for an inflated price -- assuming that the deal isn't scuttled entirely.

It is indeed a game of "liar's poker" which invariably plays to the benefit of the loudest, boldest stakeholder who gains the attention of all of the existing shareholders. Some would call it extortion:

Committee tells Dell to up his offer as shareholder vote looms
Michael Dell needs to up the ante on his $24.4 billion proposal for the struggling PC maker in light of Carl Icahn's latest announcement that he's got $3 billion to fund an alternative buyout scenario. That's the word from Dell's special committee evaluating potential takeover bid proposals. "It's a game of chicken," a shareholder said. "Icahn's going for the bump." The New York Times (tiered subscription model)/DealBook blog (7/2), Reuters (7/3)

Be assured of these things:

1) If Icahn actually does finance a deal, the terms for the servicing and retirement of the debt component (i.e., most if not all of the deal) will be terminal for the Company, and for its stakeholders, who will then be held hostage by predatory creditors;

2)  If Icahn is bought out by Michael Dell in a typical short-run greenmail play, Icahn will walk away with a huge payday, and the stakeholders will be demanding a higher price for their shares from Michael Dell, who will then appear as if he had deliberately low bid his offer on the company. 

Greenmail, or a hostile takeover with debt financing will prove very expensive for Michael Dell, and possibly the shareholders as well.

I believe with a number of outdated tech-oriented firms losing market share and revenues, we'll be seeing many more greenmail attacks, as well as attacks from hostile takeover artists. It would be great material for a game show...we could call it "Dealing For Dinosaurs." I'm certain trend-spotters and Futurists would be very much in agreement with me on this much: the economic environment in the united States is ripe for Greenmail and hostile takeovers.

Douglas E Castle 

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