What is Whitemail?

Whitemail is a type of strategy utilized by companies in an attempt to undermine a hostile takeover attempt. The idea behind the approach is to make the attempt unprofitable to the corporate raider and force him or her to eventually relinquish control of any shares acquired as part of the attempt. In order to accomplish this goal, the whitemail strategy may use a number of methods, including issuing more stock to dilute the interest of the raider.

A whitemail strategy may be launched as a means of offsetting a move by a raider that is known as greenmail. Essentially, greenmail is a strategy in which an investor begins to buy shares with the apparent purpose of gaining controlling interest in a company and forcing a takeover. The idea is often to force the company to buy the shares back at prices above market value, allowing the investor to earn a significant profit. Rather than bowing to this type of demand, the company may use whitemail approaches to force the investor into a corner where the shares must be sold at more equitable prices.

One of the most common approaches to whitemail is known as the macaroni defense. Here, the company begins to issue a significant number of bond issues that carry a provision requiring that the bonds be settled at higher rates if the business is successfully taken over. This approach significantly increases the amount of expense the raider would incur as part of the takeover, and may offset enough of the projected profit to render the attempt impractical. The company successfully defeats the takeover and is able to retire the bonds at rates that are less than the inflated figures the raider would have paid had he or she gained control of the company.

Another hallmark of the whitemail approach is to issue more shares that are quickly purchased by white knights and others who wish to defeat the corporate raider. Doing so lowers the percentage of the raider’s ownership in the company and makes the takeover attempt that much harder. At some point, the raider may find that continuing to attempt the takeover is a waste of time and resources, and decide to sell his or she shares back to the company or its loyal shareholders at current market value. This may allow the raider to still earn a small return, although the amount is likely to be much less than the originally projected return from a successful takeover.

A company may also employ the approach of repurchasing available stocks from other sources before the raider can gain control of them. This whitemail approach can sometimes lead to selling the shares to a holding company created for that purpose, and using those shares to create an employee stock ownership plan (ESOP). Here, the raider has a certain period of time to sell his or her shares to the holding company at a specified rate, or be left with little to nothing to show for the takeover effort. Many nations have regulations in place that require companies that use this ESOP model to keep the stock ownership in place until it is sold to a friendly investor, at which time plan participants are reimbursed a flat rate per share in their possession, and the company can begin to trade on an exchange once more.