What is a Bear Hug?
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. The acquirer makes a generous offer to acquire the company at a price that exceeds what other bidders are willing to pay. This helps to eliminate the problem of competition from other bidders and also makes it difficult for the target company’s management to reject the offer.
The offer is often unsolicited, meaning that it is usually made at a time when the target company is not actively looking for a buyer. The acquirer’s management makes an offer to the board of directors of the takeover target because they see value in that company. This is true even if the target company has not shown any willingness to be acquired by another company.
How It Works
A “bear hug” is, physically, the act of putting one’s arms around another person in such at a way that they are held very tightly and probably not able to “escape” from the hug. In the area of mergers and acquisitions, the bear hug strategy is designed to render the target company virtually incapable of escaping the takeover attempt. Again, the acquirer makes a very generous offer to the target company, well in excess of what the company would probably ordinarily be offered if it were actively looking for a buyer. Because the board of directors is legally obligated to act in the best interests of the shareholders, the management is unable to reject such an offer that creates substantial value for the company’s shareholders.
Although a bear hug is a form of a hostile takeover attempt, it is designed to leave the target company’s shareholders in a better financial position than they were in before the takeover. In other words, while the takeover itself may be hostile, the purchase offer is very friendly. Failure by the board to accept the offer may attract lawsuits from shareholders who are deprived of the opportunity to receive a maximum return on their investment. If the directors are reluctant to accept the offer, the acquirer may choose to present the offer directly to the shareholders.
Reasons for a Bear Hug Takeover
The following are some of the reasons why companies prefer using a bear hug takeover strategy rather than other forms of takeovers:
1. Limit competition
When there is public information that a company is looking to be acquired, there are likely to be multiple interested buyers. The potential buyers will aim to secure the acquisition of the target company but, of course, at the best possible price.
When a company decides to pursue a bear hug takeover, it offers a price that is well above the fair market price. This discourages other bidders from attempting to pursue the takeover, thereby clearing the field, so to speak, for the bear hug acquirer.
2. Avoid confrontation with the target company
Companies attempt a hostile takeover because the management of the target company is reluctant to accept an offer to acquire their company. The alternative is to approach the shareholders directly to get their approval, or fighting to replace the management or board of directors of the company.
In the case of a bear hug, the acquirer takes a softer approach by tendering a generous offer that the management of the target company is likely to be receptive to even if they hadn’t been actively thinking about acquisition by another firm. The target company’s management is under a fiduciary responsibility to generate the highest return for their shareholders. The goal of the bear hug strategy is to, ideally, convert the initially hostile takeover into a friendly, agreed upon takeover/merger. If successful, the strategy can eliminate obstacles and legal disputes that commonly occur in hostile takeover acquisitions.
Rejection of a Bear Hug
Sometimes, the management of the target company may reject the bear hug for a variety of reasons. The management may turn down the offer on the basis that they genuinely believe the deal is not in the best interests of the company’s shareholders. However, unless rejecting the offer is truly justifiable, two potential problems may arise.
1. Acquirer makes a tender offer directly to the shareholders
If the management rejects the offer, the acquirer may approach the shareholders directly with a tender offer to purchase shares of the company at an above-market price. The acquirer offers to buy shares from every shareholder of the company at a price that gives them a sizeable profit.
2. A lawsuit against the management
When the management cannot justify their decision to reject such a generous offer, the shareholders can file a lawsuit against management. Again, the board of directors has a fiduciary responsibility to serve the best interests of stockholders.
CFI is the official provider of the Financial Modeling and Valuation Analyst (FMVA)™ certification program, designed to transform anyone into a world-class financial analyst.
To keep learning and developing your knowledge of financial analysis, we highly recommend the additional CFI resources below: