By now, you must have heard about the bear hug strategy on numerous occasions. While this picturesque term certainly paints a vivid picture, bear hug actually has a precise meaning in the world of mergers and acquisitions. Put simply, it’s an unsolicited offer from a potential acquirer that’s often too appealing for the company’s board to refuse.
But how does this strategy work in practice, why does it happen, and what happens if the board rejects it? Keep reading to learn more about what a bear hug is in business and how it affects all stakeholders involved.
Key Takeaways
- A bear hug in business is an unsolicited offer to acquire a company at a price higher than its stock market value.
- A bear hug is a type of hostile turnover in which the acquirer directly approaches the stakeholder instead via public media without first discussing it with the company’s board of directors.
- The term bear hug in the context of business acquisition likely comes from the idea of a bear’s tight embrace when it catches its prey. Similarly, a bear hug in business symbolizes a strategic move that aims to restrict the target company’s options.
- There are some benefits of the bear hug approach, such as attracting shareholders with premium offers, minimizing competition, avoiding drawn-out negotiations, and increasing shareholder value.
- An example of a bear hug acquisition is when Microsoft offered to buy Yahoo’s shares at a substantial 62% acquisition premium, creating a significant difference between the proposed purchase price and Yahoo’s pre-merger value.
What is a Bear Hug in Business?
A bear hug in business is a hostile takeover strategy where a potential acquirer offers to buy another company for a price that is significantly higher than its actual market value. Since this generous offer is typically much higher than the bids made by other firms, a bear hug offer might stifle bidding competition and make it harder for the target company’s management to reject.
How Does the Bear Hug Strategy Work?
The term bear hug quite vividly captures the essence of this hostile takeover strategy. It’s the type of hug you can’t escape, as if someone is holding you around their arms very tightly. But just as the term says, it’s ultimately still a hug. What better way to explain bear hugs in acquisitions and mergers? The bear hug is quite literally “an offer you can’t refuse.”
While hostile in nature, the bear hug strategy is still not unfriendly because if it’s accepted, it can leave the company’s shareholders in a better financial position than they were before the acquisition. The purchase offer is unsolicited but generous. On the other hand, it can raise ethical questions since it lacks transparency and fairness. When the potential acquirer makes an appealing bid that exceeds what the company is actually worth, it puts the board of directors in a tough situation. Since they are obliged by law to act in the best interests of the shareholders, they are practically unable to reject such an offer since it would bring significant financial gain.
Reasons For A Bear Hug Takeover
Bear hugs are such an intriguing concept. They are unsolicited and go beyond the company’s actual market value, so why would someone pursue them? What’s in it for them? The following are some of the reasons why businesses go for a bear-hug takeover strategy instead of other types of takeovers.
Limit Competition
Imagine your favorite cake shop is closing down, and there’s the last piece of your favorite muffin up for grabs. Would you pay more than its actual price to avoid someone else beating you to it? While this might sound like a simple analogy, it perfectly illustrates why an acquirer would use the bear hug takeover strategy in business.
When there’s public knowledge that a company is for sale, the competition is intense. The prospective buyers will seek to acquire the target firm at the best possible price, but a bear hug acquirer will go well above the company’s market value and offer a substantial premium, therefore eliminating competition and eventually winning the bid.
Avoid Confrontation With The Target Company
In general, hostile takeovers typically happen when the company’s management doesn’t want to sell, so the bidders go directly to the stakeholders to either get their approval or try to replace the management board.
On the other hand, the bear hug strategy is a form of a hostile takeover, but it’s a softer approach since it essentially aims to transform a hostile takeover into a friendly, agreed-upon takeover. The acquirer makes a generous offer to the board, maintaining positive relationships with the target company and eliminating conflicts that often arise in hostile takeover transactions.
What if a Bear Hug is Rejected?
The board has the responsibility to keep the company’s best interests at heart. So, when presented with an unsolicited and generous offer from a bear hug acquirer, the target firm’s management might reject it for various reasons. They could either believe that it’s not a good decision for the company, or they could simply not like the deal.
Even though bear hugs are enticing, they are nevertheless often refused by the management board. An interesting example of a bear hug in business that we mentioned earlier happened in 2008 when 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. Here are some of them.
The Acquirer Makes a Tender Offer Directly To The Shareholders
If the board refuses the initial bid, another option for the acquirer is to directly approach the corporation’s shareholders with an irresistible offer. There’s a big chance that the shareholders will agree to it, given the fact the bidder is proposing to buy their shares at a premium price at an above-market price, ensuring a significant return on investment for them.
A Lawsuit Against The Management
The management board is obliged to justify their reasons for declining such a generous offer. If they fail to provide a reasonable explanation for their rejection of a bear hug, the shareholders can bring a lawsuit against them. For instance, in the case of Yahoo and Microsoft we mentioned above, Yahoo’s board of directors faced numerous lawsuits after they turned down the $47.5 billion bid offer from Microsoft.
Advantages and Disadvantages of Bear Hug in Business
Generally speaking, bear hugs in business are neither positive nor negative. The outcome depends on each individual case, so there are numerous pros and cons of the bear hug strategy to consider. Here are some of them.
Advantages
One of the most significant benefits of bear hugs is the monetary gain for the shareholders. Investors opt for bear hug offers because they recognize the appeal to shareholders surpassing the allure for board members or management. Purchasing a company above its market value translates directly into monetary gains for shareholders, often prompting potential acquirers to bypass the board and approach shareholders directly.
Furthermore, these substantial offers have the power to eliminate competition, as the strategy involves offering a larger amount of money than what the market dynamics dictate. Additionally, bear hug investors can motivate the board to accept the deal by promising them high-value payouts.
Disadvantages
The bear hug strategy also comes with a set of challenges and drawbacks. For instance, there’s a potential risk of increased competition and new merger offers from so-called white knight investors, leading the entire strategy to backfire for the bear hug investors. This can happen if the target company decides to turn to friendly competitors offering them even more lucrative deals.
In addition, another disadvantage of this approach is the potential frustration among board members as the underlying intentions of the bear hug strategy are often to displace existing leadership. This can trigger conflicts not only between the acquiring and target companies but also within the target company itself and its shareholders. Furthermore, there’s the looming threat of potential legal issues in case the board rejects the offer and fails to justify the decision to the stakeholders.
Understanding Bear Hug for a Successful Acquisition
As you can see, a bear hug in business is a complex and strategic acquisition move. Although hostile in nature, it may benefit the target company in the long run, aiming to leave shareholders in a better financial position than before the turnover. However, despite the generosity of these offers, these offers don’t always guarantee successful acquisitions. What matters is that both the leadership and stakeholders understand the nuances of the bear hug approach so that they can make well-informed decisions that resonate with the best interest of all parties involved.
