Raiders say they won't take it. Managements say they won't pay it. Nobody wants to be blamed for it. And Wall Street takeover experts are trying to figure out whether it happened twice this week.
It is greenmail. Greenmail is a nasty sounding word. Composed of one part money (green) and one part extortion (blackmail), greenmail conjures up images of evil corporate raiders and self-interested managements making dirty deals that benefit themselves while small, helpless shareholders watch from the sidelines.
Greenmail is a transaction in which a company buys its own stock, usually at a premium price, from a shareholder who poses a threat to management. In return, the shareholder, who is often referred to as a corporate raider, agrees to drop his challenge to management. The raider's challenge frequently is a takeover bid.
The traditional proshareholder argument against greenmail is that it hurts stockholders by taking away the chance to receive a premium price in a takeover. According to this argument, greenmail is a management-entrenchment device that allows corporate executives to stay in power by ending the takeover threat at the stockholders' expense.
The traditional promanagement argument in favor of greenmail is that it ends a takeover threat from a raider who is trying to buy a company for less than its fair value. According to this argument, shareholders will benefit in the long run because the stock price will rise higher than the value of the raider's takeover bid.
Earlier this week, two transactions that can best be described as greenmail hybrids took place. In both deals, public companies ended takeover threats by buying back shares from a single stockholder. While that may sound like greenmail to the rest of the stockholders, the raiders and managements involved say it was not.
The first greenmail hybrid of the week was announced in Annapolis on Monday, when UNC Resources Inc. announced that it would buy back 4.4 million shares, or about 20 percent of its stock, from Houston investor Charles Hurwitz. Hurwitz, whose reputation as a rugged takeover specialist made UNC management nervous, agreed to sell his stock to UNC for $11.50 a share in cash plus warrants that give him the right to buy 3.5 million UNC shares at $13.50 a share.
As part of the deal, Hurwitz promised not to buy any UNC shares for 10 years, other than those granted to him through the warrants. He also agreed not to take any steps to exercise influence over UNC.
The parties argue that this is not greenmail because Hurwitz did not receive a cash price for his shares in excess of UNC's stock market price. Hurwitz received $11.50 a share in cash; UNC stock closed Monday at $11.75.
However, in addition to the $11.50 a share, Hurwitz also received potentially valuable warrants to buy another 3.5 million shares. That deal was not offered to any other stockholders. Hurwitz already has made a pretax, pre-expenses profit of about $7.3 million, and it is clear that UNC paid Hurwitz to drop his challenge to management. While this is not pure greenmail, it is at least a greenmail hybrid.
The second deal of the week involved Canada's wealthy Belzberg family and Ashland Oil Inc. In that deal, the Belzbergs, who recently purchased 9.2 percent of Ashland, offered to acquire the company for $60 a share, or about $1.7 billion.
That billion-dollar takeover will never take place. On Monday, Ashland's investment banker, Bruce Wasserstein of First Boston Corp., and the Belzbergs' adviser, Marty Siegel of Drexel Burnham Lambert Inc., negotiated a deal in which the Belzbergs agreed to drop their bid and sell their stock to Ashland for $51 a share in cash. A Belzberg spokeswoman said their pretax, pre-expenses profit on the stock is about $15.4 million.
The parties argue that this was not pure greenmail for two reasons. First, there was not a premium price, because the Belzbergs agreed to sell their shares for slightly lower than Ashland's stock market price. Second, Ashland yesterday unveiled a major stock buyback program that should enhance its value for other shareholders. A source close to the Belzbergs said they insisted that, as part of their deal, Ashland take steps to increase its value for all shareholders.
Greenmail does not always work against small stockholders. In the most controversial greenmail deal ever, Walt Disney Co. bought Saul Steinberg's stake in June 1984 for $70.83 a share, giving him a $30 million pretax profit. Disney also picked up his $28 million in expenses.
In return, Steinberg dropped his $72.50-a-share takeover bid for Disney, an offer that management said was not fair value. Disney stock, which recently split, closed yesterday at the equivalent of $146 a share.