Home Blog Bear Hug (Meaning In Business And How It Work: All You Need...

Bear Hug (Meaning In Business And How It Work: All You Need To Know)

What is Bear Hug?

What is a bear hug in finance?

How does it work?

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!

Are you ready?

Let’s get started!

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. 
Author

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.

Hostile Takeover

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. 
Author

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
Author

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.

My Investing, Business, and Law Blog

By the way, on this blog, I focus on topics related to starting a business, business contracts, and investing, making money geared to beginners, entrepreneurs, business owners, or anyone eager to learn. 

Just so you know who I am and where I come from, a little about me…

I have a university degree in finance and law. 

I have worked in an international financial institution dealing with the stock market, stock, bonds, corporate financing, and securities.

I practiced law in private practice where I advised and consulted entrepreneurs and business owners on many aspects of their business, such as how to start new business ventures, how to scale their business, how to navigate commercial contracts, and how to set themselves up for success. 

I also acted as an in-house counsel and eventually as the General Counsel in a rapidly growing technology company going through hypergrowth, dealing with international Fortune 500 clients, and operating internationally. 

Let me tell you, in my career, I’ve learned a lot about business, investing, investment decisions, business decisions, and law. 

I started this blog out of my passion to share my knowledge with you in the areas of finance, investing, business, and law, topics that I truly love and have spent decades perfecting.

You may find useful nuggets of wisdom to help you in your entrepreneurship journey and as an investor.

Hey You!
Looking For Real Actionable Tips To Reach Your Financial And Business Goals?

If you’re interested in my actionable tips, guides, and knowledge on how to achieve your financial and business goals, subscribe to my blog and I’ll share with you my premium and exclusive content that will blow you away!

I’d love to share the insider knowledge that I’ve acquired over the years helping you achieve your business and financial goals.

Now, let’s look at a summary of our findings.

Bear Hug Finance

  • A bear hug is a type of acquisition strategy where a company offers to buy out the shares of another company at a price well above its market value 
  • For a takeover bid to qualify as a bear hug, the offering price must be much higher than the target company’s current value 
  • There are many reasons why bear hug strategies are used, such as pursue a more friendly takeover strategy, reduce bidding competitors, complete an acquisition in less time than having to pursue a truly hostile and confrontational strategy, and compel the board of directors of the target to accept it
  • A bear hug offer can be made on any type of company such as a company in financial distress, a startup, or even a well-established company not looking to be acquired 
Acquisition agreement 
Acquisition strategy 
Black knight 
Board of directors meeting
Data room for due diligence
Due diligence 
Exchange ratio
Fiduciary duty 
Friendly takeover 
Gray knight 
Hostile takeover 
Leveraged buyout
Market value 
Poison pill 
Price per share 
Purchase of assets 
Purchase of shares
Revere takeover 
Reverse merger
Reverse triangular merger
SPAC IPO
SPAC stock
Special purpose acquisition company 
Stock-for-stock merger
Swap ratio
Takeover bid 
Toehold purchase 
What is a SPAC
White knight
Author
Asset deal 
Average cost 
Backward integration 
Bearer bonds 
Business consolidation
Business lawyer 
Closing costs 
Creeping takeover 
Dawn raid
Escalator clause 
Financial accounting 
Godfather offer
Golden parachute
M&A lawyer 
Marginal cost of funds
Merger clause 
Net book value of assets
Non performing assets 
Offer price 
Proxy fight 
Return on equity 
Takeover premium 
Tender offer
What is a divestiture 
What is a spin off 
Year over year
Author
Editorial Staff
Hello Nation! I'm a lawyer by trade and an entrepreneur by spirit. I specialize in law, business, marketing, and technology (and love it!). I'm an expert SEO and content marketer where I deeply enjoy writing content in highly competitive fields. On this blog, I share my experiences, knowledge, and provide you with golden nuggets of useful information. Enjoy!

Most Popular

Form LLC-12 (What It Is And How It Works: All You Need To Know)

Form LLC-12 (What It Is And How It Works: All You Need To Know)

Form SI-550 (What It Is And How It Works: All You Need To Know)

Form SI-550 (What It Is And How It Works: All You Need To Know)

Biennial Statement (New York: What It Is And How It Works)

Biennial Statement (New York: What It Is And How It Works)

Tender of Delivery (Legal Definition: All You Need To Know)

Tender of Delivery (Legal Definition: All You Need To Know)

UCC 2 601 (Explained: Buyer’s Rights on Improper Delivery)

UCC 2 601 (Explained: Buyer’s Rights on Improper Delivery)

UCC 2 508 (Explained: Cure By Seller of Improper Tender)

UCC 2 508 (Explained: Cure By Seller of Improper Tender)

UCC 2 612 (Explained: Installment Contracts And Its Breach)

UCC 2 612 (Explained: Installment Contracts And Its Breach)

Substantial Performance (Contract Law: All You Need To Know)

Substantial Performance (Contract Law: All You Need To Know)

Editor's Picks

Can LLC Issue Stock (Overview: All You Need To Know)

Can LLC Issue Stock (Overview: All You Need To Know)

What Does LTD Stand For (Business Name Abbreviation)

What Does LTD Stand For (Business Name Abbreviation)

How To Start A Business In Idaho [Step-By-Step Ultimate Guide]

How To Start A Business In Idaho [Step-By-Step Ultimate Guide]

INC Meaning (What Is The Meaning of INC?)

INC Meaning (What Is The Meaning of INC?)

MSA Agreement (Best Overview: All You Need To Know)

What is an MSA agreement? Why do you need an MSA? What are the elements of...

Debt securities (Best Overview: All You Need To Know)

Debt securities (Best Overview: All You Need To Know)