What is Bear Hug?
What is a bear hug in finance?
How does it work?
In this article, I will break down the notion of Bear Hug so you know all there is to know about it!
Keep reading as I have gathered exactly the information that you need!
Let’s discuss bear hugs to better understand their meaning in business and how they work!
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What Is A Bear Hug
A “bear hug” is a term used in business and finance to refer to an unsolicited offer made by one company to purchase another company at a price higher than it’s market value.
A bear hug takeover is generally a hostile type of takeover and one where the target company may not have had made expressed any desire to be acquired.
The reason why the offering company agrees to pay more for the target company than it’s market value is mainly due to the perceived value.
In other words, the acquirer estimates that even by paying more to acquire the target, the bear hug acquisition will allow it to achieve economies of scale, enter new markets, accelerate its growth, or create value for its shareholders in other ways.
Bear Hug Definition
According to the Corporate Finance Institute, a bear hug is defined as follows:
A bear hug is a hostile takeover strategy where a potential acquirer offers to purchase the stock of another company for a much higher price than what the target is actually worth.
As you can see from this definition, a bear hug can be summed up as:
- A hostile takeover
- Where the acquirer
- Pays a higher price
- Than what the target company is worth
The main reason why a company will offer to purchase another company at a higher price is to outbid competitors and make it difficult for the target company to reject the offer.
Since bear hugs are a form of a hostile takeover, it’s worth looking at the definition of a hostile takeover.
According to Investopedia, a hostile takeover is defined as:
The term hostile takeover refers to the acquisition of one company by another corporation against the wishes of the former.
In other words, you can say that a hostile takeover is:
- The acquisition
- By one company (acquirer)
- Of another (target)
- Against the target’s desire
Why The Term “Bear Hug”
Why do we use the term “bear hug” in business?
In common English, we refer to a bear hug when a person physically wraps their arms around another person so tight that the “hugged person” cannot escape or go free.
According to the Merriam-Webster dictionary, a bear-hug, bear-hugging, or bear hugs are defined as:
A rough tight embrace
If you extrapolate this to business or in M&A transactions, you can say that a bear hug is a type of offer made by one company to acquire another where the conditions make it very difficult for the target company to escape from.
The way the acquirer makes it difficult for the target to “escape” the hostile takeover is by making the purchase offer so attractive that either the target company’s board of directors may have a hard time refusing or getting rid of any potential competitors bidding to buy the same target.
How Do Bear Hugs Work
Fundamentally, the way a bear hug works is quite simple.
By definition, a business bear hug is a form of a hostile takeover.
This means that a bear hug is generally an offer made by one company (the acquiring company) to purchase another company (the target company) where the target had not expressed the desire or inclination to participate in the acquisition.
However, since a bear hug requires that the acquirer is prepared to pay over and above the target company’s market value, the offer is beneficial to the target (at least from a financial and economic perspective).
So you can consider that the offer is technically for a “hostile” takeover but the essence of the offer is quite “friendly” to the target.
Once the target company receives a highly attractive purchase offer, then its board of directors is placed in a tough position and sort of forced to accept the offer.
The main objective of the board of directors is to make decisions that are in the best interest of the shareholders and bring value to them.
Since the hostile offer that is made on the company generates value to the shareholders, the board of directors can accept it and go through with the corporate bear hug or reject and potentially face lawsuits from various shareholder groups.
In some cases, when the board of directors does not respond to the bear hug letter, the acquirer can circumvent them and place an offer directly with the shareholders.
That’s when the shareholders may be inclined to accept the offer putting further pressure on the board of directors to give in.
Benefits of Bear Hug Takeovers
What are the benefits of taking over a business using the bear hug strategy?
There are many reasons why a bear hug takeover method can be more fruitful than other takeover methods, particularly:
- It allows the acquirer to beat bidding competitors
- Dissuades competitors from bidding
- It’s a friendly type of takeover
The first objective that may want to be pursued with a “bear hug” acquisition strategy is to outbid competitors interested in buying the same target.
In many cases, when news or rumors start spreading that a target company is open to being acquired or is receptive to offers, many companies may show interest in the acquisition opportunity.
A company that is really interested in winning over the target may place an offer at significantly over market value to make it attractive for the target to accept but also to force the other competitors out of the race.
When a bear hug offer is placed, it will also result in dissuading other potential acquirers from putting a bid as they will need to put a higher offer on the table to have a chance of winning the deal.
Finally, although a bear hug in business is not an offer that was solicited by the target company, it still remains a positive type of offer as the acquirer is willing to pay more for the target.
As such, with a bear hug, the offer is so attractive that the target’s management will be inclined to take it and be receptive to it.
Otherwise, the takeover can become confrontational as the acquirer can make various attempts at acquiring the target like winning seats on the board or targeting the shareholders with an offer.
Bear Hug Letter
What is a bear hug letter?
A bear hug letter is essentially a “letter” or an “offer” that is sent by one company (offeror) to the board of directors of another company (offeree) laying out the terms and conditions based on which the offeror intends to buy out the offeree.
The “bear hug letter” will generally present an offer where the offeror offers a purchase price that is far in excess of the offeree’s current market price.
The letter can be sent by the acquirer directly to the board of directors by way of private communication or it can be made through a public announcement.
When a bear hug letter is received, the board of directors of the target company will have the fiduciary duty to adequately evaluate the offer and make a decision in the best interest of the shareholders.
Bear Hugs Takeaways
So there you have it folks!
What’s a bear hug?
How do you define bear hug?
Why is it called a bear hug?
You may have heard of the terms bear hug business, bear hug M&A, bear hug corporate, or just “bear hug”.
A bear hug, no matter how it is expressed, refers to the process of a company making an offer to buy the shares of another company at a significantly higher price per share than the share market value.
The reason why this is the case is that the acquiring company has a strong desire to buy out the target company and wants to make an offer that is so attractive that it will be really difficult for the target’s board of directors to refuse.
The reason why it’s called a “bear hug” is that the offer is so generous that the target company will not be able to escape it (and will need to accept it) just like when you give such a strong hug to a person where they are unable to escape.
Target companies have a hard time escaping from bear hug offers as the board of directors has a fiduciary duty to make decisions in the best interest of the shareholders and rejecting a really generous deal may appear to be in violation of their duties.
If the board rejects the deal, they may attract lawsuits against the company management for rejecting a deal that was otherwise in the best interest of the shareholders.
I hope this article helped you better understand what is a bear hug in business.
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Bear Hug Finance
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