What is a Bear Hug?
A bear hug is a form of a hostile takeover strategy where a company offers to purchase the stocks 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, making it difficult for the target company’s management to reject the offer.
The offer is often unsolicited, meaning that it is made at a time when the target company is not actively looking for a buyer. The acquirer makes an offer to the board of directors because they see value in the target company, even if the company has not shown any willingness to be acquired by another company.
How It Works
A “bear hug” is defined as the act of putting the arms around another person tightly and roughly in a way that the hands are locked around the opponent and the latter is held tightly to the chest. The person offering the hug is in a dominant position and exercises greater control over the opponent.
In a business scenario, the acquirer offers a generous offer to the target company, which is in excess of what the company would ordinarily get when seeking buyers in the market. Since the board of directors is legally obligated to act in the best interests of the shareholders, the management is unable to reject such a generous offer that creates value for the 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. The directors are put in a position where it would be unable to reject the generous offer since it must act in the best interest of the shareholders.
Failure by the board to accept the offer may attract lawsuits from the shareholders who are convinced that the offer given is the best one that the company can get. If the directors are reluctant to accept the offer, the acquirer may present the same offer directly to the shareholders.
Reasons for a Bear Hug Takeover
The following are some of the reasons why companies prefer a bear hug takeover over other forms of takeovers:
1. Limit competition
When there is public information that a company is looking to be acquired by other companies in the industry, there is likely to be dozens of interested buyers. The buyers will be competing to offer a price that reflects the current market value of the target company.
When a company decides to pursue a bear hug takeover, it offers a generous price that is beyond the market price. Potential bidders would be forced to stay away since it would be uneconomical to offer a price that would be difficult to recover later.
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. It means that the acquirer will be unsuccessful in taking over the company without the consent or cooperation of the management. The alternative is to approach the shareholders directly to get their approval or by 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 offering a generous offer that the management would not reject in normal circumstances. The management is under fiduciary responsibility to get the best value of the shareholders, and must, therefore, act in the best interest of the shareholders. It avoids the confrontations and legal disputes that are common in other forms of 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 it is not in the best interests of the shareholders or the terms of the offer are designed to be disadvantageous the company and its shareholders. Unless the offer’s rejection is justifiable, there are two possible outcomes from the situation:
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 rate price. The acquirer offers to buy shares from every shareholder of the company at a price that gives them the incentive to sell their shareholding and earn a profit. If the target shareholders accept the offer, the acquirer can gain a majority shareholding of the company in less than a month.
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 the management. The management should get the best possible value for shareholders in every transaction, and rejecting such an offer would be going against the wishes of the shareholders.
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