Definition: The Greenmail is the anti-takeover tactic undertaken when the target firm buys back its own shares at an inflated price from the unfriendly firm which possesses a large stock of the target company and is threatening a hostile takeover.
In other words, the money given by the target firm to another company, called as a corporate raider to buy back its own shares in order to prevent the takeover bid is called as a greenmail. The target company is forced to pay a substantial premium to get the control over its own shares. This strategy is also called as “bon voyage bonus” or a “goodbye kiss”.
Greenmail is like blackmail, wherein the corporate raider demands a ransom amount to release the control over the target company’s stock. Actually, the corporate raider has no intention of buying the target company; it just wants to make a profit from the costly buy backs.
On the acceptance of greenmail payment, the corporate raider stops chasing the takeover and do not buy any shares of the target company for a specified time period. Although the target company gets control over its own shares, it may end up with the considerable amount of additional debt, which might have been taken to finance the greenmail.