DealLawyers.com Blog

June 25, 2014

Activist Funds Dust Off ‘Greenmail’ Playbook

Here’s news from this WSJ article:

More companies are resorting to an old tactic to get rid of activist investors: Pay them to go away.
The practice, which involves buying back shares from activist hedge funds, has raised concerns among some investors because it bears similarities to “greenmail,” a controversial strategy popular in the 1980s. Back then, aggressive investors such as Carl Icahn and the late Saul Steinberg bought company shares and threatened a hostile takeover. Eager to avoid a battle, companies including Walt Disney Co. and Goodyear Tire & Rubber Co. bought back their stakes above market price, giving the activists a quick profit. The practice, widely criticized as corporate blackmail, largely died out by the early 1990s as companies beefed up defenses and lawmakers took steps to discourage it.

But in the past 12 months, at least 10 companies have repurchased blocks of shares from activist investors, including Daniel Loeb and William Ackman, according to FactSet SharkWatch. That is more than in the previous six years combined. The practice differs from greenmail in two crucial aspects. The share buybacks aren’t at a premium to the market but typically at or slightly below the last trading price. They also don’t follow threats of hostile takeovers. Advisers say these deals are likely to continue as activist hedge funds, which have targeted more companies in recent years, look to sell out of holdings.

Since the current wave of activism started in 2010, these investors have launched 1,115 campaigns, according to FactSet, and many are ripe for exits. The buybacks have fueled a common criticism of activist investors: They chase short-term profits at the expense of other shareholders. “You can call it greenish mail,” said Spencer Klein, a lawyer with Morrison & Foerster LLP who advises companies facing activist investors. “These investors are getting an opportunity that others aren’t, and that’s not a terribly popular notion.”