What Is A Bear Hug In Business?

When a firm makes an offer to buy another company for a price that is significantly higher than the target firm’s actual market value, this is referred to as engaging in a bear hug. Keep reading to learn more about what a bear hug is in business and how it affects all stakeholders involved.

How A Bear Hug In Business Works

A bear hug in business occurs when a firm offers to buy another company for a price far higher than the target firm’s market value. Unlike other offers, a bear hug offer might stifle bidding competition since it is typically much higher than the bids made by other firms.

Reasons For A Bear Hug Takeover

The following are a few of the benefits of utilizing a bear-hug takeover strategy instead of other types of takeovers:

To Limit Competition

When a business is looking to be acquired, many competing bidders usually exist. The prospective buyers will seek to acquire the target firm at the best possible price. When an offer is well above the company’s market value, it usually clears the field for the bear hug acquirer.

To Avoid Confrontation With The Target Company

If successful, a bear hug in business can eliminate conflicts that often arise in hostile takeover transactions.

A hostile takeover is a corporate tactic in which the management of the target firm is unwilling to accept an offer to purchase. Alternatively, the bear hug approach aims to transform a hostile takeover into a friendly, agreed-upon takeover. 

Rejection Of A Bear Hug In Business

The target firm’s management might reject a bear hug for various reasons. For example, in 2008, Yahoo rejected an offer from Microsoft even though the offer was 62% more than the closing price of Yahoo stock at the time. 

Because a firm has a fiduciary duty to act in the best interests of its shareholders, issues may arise if a bear hug is rejected: 

The Acquirer Makes a Tender Offer Directly To The Shareholders

A tender offer to purchase shares of the company at an above-market price is another option if the management refuses the initial bid. The acquirer can directly approach the corporation’s shareholders, proposing to buy their shares at a premium price.

A Lawsuit Against The Management

If the executives fail to provide a reasonable explanation for their rejection of a bear hug, the shareholders can bring a lawsuit against them.

Merger Or Acquisition

A merger or acquisition occurs when one company is bought out or combined with another company with similar ambitions. In a merger, aspects of both companies are integrated into the new company. Whereas in an acquisition, one company is absorbed by another. 

Unlike an IPO, when the market determines your company’s value, this exit plan allows you to negotiate the sale price.

The downside of this business exit strategy is that it could take a long time. According to BizBuySell, just 20% of businesses listed for sale end up being bought. So if your first choice of exit strategy is to merge or be acquired, it’s a good idea to have a plan B in place just in case!

Ownership Or Employee Buyout

It is possible that when you are ready to exit, people who work for your company may have an interest in purchasing it. This business departure approach could result in a smoother transition and increased devotion to your business’s heritage because these people have a vested interest in the business and may already know how to manage it.

In addition, because these people know you well, they are likely to be more flexible regarding your future involvement (you may want to stay on as a mentor or advisor, for example).

Dissolve Your Company

Liquidation doesn’t have to be a defeat, just the end of an era.

This is the most comprehensive business exit strategy. It involves closing your company and selling all assets. Keep in mind that you’ll have to use the money you make through these sales to settle outstanding debts and distribute profits to shareholders. It’s also important to consider how this exit strategy will influence your employees and clients.

Declare Insolvency

This last strategy isn’t one that any business owner wants to effect, but if things go wrong, bankruptcy may be your only alternative.

Although it may feel like it at the end, filing for bankruptcy isn’t the end of the world. You will probably lose assets and have to repay your debts, but you’ll be free of commitments and the burden of the company.

Bankruptcy is one of the many risks of starting a business. So, if your company is facing bankruptcy, make sure you thoroughly understand the process.

Key Takeaways

Preparing forward is the best way to create an exit strategy business plan. Even before you start your business, think about how you can exit it if the time comes. Proactively planning this process – what it will look like, how it will be implemented, and what the outcomes will be – can help you succeed when the time comes. 

Also, remember that there is no universal best business exit strategy; the best exit strategy for you and your company will depend on various circumstances. These circumstances may evolve as your company grows and changes, so be prepared to alter your exit strategy if necessary.