When a letter to the target’s board of directors or management outlining an offer to purchase the target for a significantly higher price than its present value. It’s important to send a Bear Bug letter when a hostile buyer who questions the target’s management’s willingness to sell frequently sends bear hug letters.
A bear hug letter can be sent confidentially to the target’s board of directors or made public. Given the board’s fiduciary responsibilities, rejecting a bear hug letter that offers a significant price premium may be challenging.
This article will discuss what to look for in a bear hug letter, as well as some responses for a target company’s board of directors and management to consider. We also gave a real-life example of a bear hug letter.
What is a Bear Hug Letter?
Bear Hug letter is the company’s first formal letter to the target company’s Board of Directors (BOD) asking about the acquisition. They can address this letter confidentially to the BOD or they can make it public at times.
It primarily comprises an introduction to the gaining firm, an introduction to the investment bank taking part in the transaction, and information about the assigned lawyer. They may or may not mention the bidding price in the letter.
The communication also instructs the target organization to begin due diligence by double-checking all internal papers. This letter is pleasant in general, but it also threatens to go directly to the shareholders.
After receiving confirmation from their end, the Securities Regulators allow bidders to disclose the acquisition. As a result, unless the bidder is certain about its bidding process, they won’t accept it. In most cases, the offer letter is not available to the public.
If the acquirer determines BOD is not interested, the acquirer makes this letter public. It puts a strain on BOD.
However, there are situations when the target company does not want to keep it private. In such a case, the target firm may issue a press release to pique the interest of both shareholders and potential buyers.
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What Should a Letter to a Bear Hug Contain?
That first letter will typically introduce the potential bidder, as well as its investment banker and lawyer, and may or may not include a suggested acquisition price. It will also have the following components:
- a statement that the letter and accompanying conversations are supposed to be kept totally confidential. If the target company is ready to proceed, both parties should sign a non-disclosure agreement as soon as workable;
- a statement that the proposal is non-binding and that legally enforceable commitments would only exist if they sign a formal contract; a request that they will give the possible bidder access to material documents and senior management at the target in order to complete due diligence; and
- a request that the bidder and the target work together only for a set period (depending upon the time needed for diligence, usually a few weeks to a month).
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Are there Advantages of a Bear Hug Letter?
- It frequently permits Target Company stockholders to be in a better financial position than they were previously.
- It offers the target company a higher price or more benefits.
- If the target business’s board of directors rejects the agreement, the gaining company may offer the proposal directly to the target company’s shareholders.
- The market will be less competitive because of this transaction.
- It enables the purchasing business to expand its product offering further.
- The purchase attempts to turn a hostile takeover into a friendly takeover.
- It may discourage other bidders from bidding because the gaining company has already offered a premium price. As a result, they avoid a bidding war.
- It requires fewer formalities and compliance requirements when compared to other types of acquisition.
Are there Disadvantages of a Bear Hug Letter?
- It might sometimes be much more expensive for the purchasing corporation.
- The bidding corporation may also take longer than expected to regain its return on investment (ROI).
- We turn if the offer is down, the company’s top management may face legal action. The target company’s shareholders can also approach the courts.
- In most circumstances, the gaining business pays a larger price than the target company’s current worth.
- The purchasing company fully removed the target company’s top management. The target company’s top management. And this practice is done with complete control. However, because of the abrupt changes in policies and direction, may have a negative impact on the target company’s growth.
- Following the acquisition, the target company is under constant pressure to improve its performance. As a result, given the high level of investment, produce better results.
How to Handle a “Bear-Hug” Letter
When a potential acquirer of a public company calls the target’s CEO or Chair and requests a meeting to discuss a matter of “mutual interest,” it is frequently the first shot fired in a takeover bid battle.
One scenario is that the potential buyer will express admiration for the target company, disclose that they are already a significant shareholder (possibly less than 10%, so they can file no insider or early warning report), and propose that the two parties enter into formal discussions to see if an outright purchase, or possibly a merger, is in both parties best interests.
The potential bidder will table a letter addressed to the target company toward the end of that conversation, with the goal of sweeping the target into as tight an embrace as possible — this is the so-called “bear-hug” letter.
Why Do They Call It A Bear Hug?
People refer to a bear hug letter as a “Bear Hug,” because it’s the bidder’s letter to the company’s chief executive officer or board of directors containing a preliminary offer to buy the company.
The letter usually asks for friendly negotiations, but it also threatens to take the deal to the stockholders if the target refuses to negotiate.
Although this threat is sometimes only implied, it is more often stated explicitly at the letter’s conclusion.
So, What’s the Meaning of a Bear Hug?
A bear hug, sometimes known as a teddy bear hug, is a takeover in which the gaining business offers a greater purchase price than the target company’s current pricing.
Because the target company is unwilling to sell, a larger price is being offered in this transaction. This acquisition makes it difficult for the target company to get out of it soon.
Because it is a pleasant approach from the opposite side, a bear hug is a hostile acquisition because it suffocates the target company. It’s as if a bear that you don’t have any other choice except to flee has gripped you so tightly.
The target company is in a similar predicament, with the purchasing corporation hugging (covering) it on all sides, leaving little room for escape. As a result, we term such acquisition a bear hug.
How Does Bear Hug Work?
A “bear hug” is the act of physically wrapping one’s arms around another person in such a way that they are held very closely and are unlikely to be able to “escape” the hug. The use of the bear hug approach in mergers and acquisitions makes the target company nearly incapable of fleeing the takeover effort.
Once again, the acquirer makes an extremely generous offer to the target company, well exceeding what the company would likely receive if it were actively seeking a buyer. Because the board of directors is legally bound to act in the best interests of the shareholders, management cannot turn down an offer that adds significant value to the company’s owners.
Although a bear hug is a type of hostile takeover, it should put the target company’s stockholders in a better financial position than before the takeover. To put it another way, while the takeover may be aggressive, the buying offer is really welcome.
If the board refuses to accept the offer, shareholders who have been cheated out of a maximum return on their investment may sue. If the board of directors refuses to accept the offer, the acquirer may choose to propose it to the shareholders directly.
What is the Purpose of Bear Hug Acquisition?
The purchasing company is willing to take over the target company by trick or by crook in a bear hug acquisition. After the acquisition, the acquiring business realizes a synergy benefit. The acquisition will either provide a competitive advantage or complement the purchasing company’s existing goods and services.
It benefits not just the acquiring firm, but also the company’s stockholders on a financial level. Only if the target company refuses to sell is it at a loss.
Is There a Hostile Takeover at Bear Hug?
A hostile takeover is defined as one in which the gaining firm has already submitted a bid for a higher per-share price than the company’s current per-share pricing. As a result, in order to avoid being taken over, the target company must develop a business value equal to or greater than the bidding value.
As a result, the hostile takeover, known as a bear hug, puts pressure on the target company to come up with a strategy or value number that proves it is in a better position as a separate corporation.
The target firm is legally bound to decide in the best interests of its shareholders; as a result, in such a situation, the target company must either “accept it or come up with a better alternative.” Shareholders frequently criticize the company’s board of Directors for rejecting such bids.
Who is Bear Hugs Target?
Bear Hug’s target enterprises are typically start-ups or troubled businesses. Often, organizations with no future growth projections or financial difficulties/issues become purchase targets.
The Benefits of a Bear Hug Takeover
Some of the reasons firms prefer to use a bear hug takeover strategy over other types of takeovers are as follows:
1. Keep competition to a minimum
There are likely to be many potential bidders when there is a public disclosure that a company is looking to be acquired. Potential purchasers will strive to gain the target company at the greatest workable price.
When a business pursues a bear hug acquisition, it proposes a price that is far higher than the fair market value. This deters other bidders from attempting to gain the company, effectively clearing the field for the bear hug acquirer.
2. Don’t get into a fight with the corporation you’re after.
Because the target company’s management is hesitant to accept an acquisition offer, companies try a hostile takeover. The option is to go straight to the shareholders for approval, or to battle to replace the company’s management or board of directors.
With a bear hug, the acquirer takes a softer approach by making a generous offer that the target company’s management is likely to accept, even if they weren’t actively considering a sale to another company.
The management of the target firm has a fiduciary responsibility to deliver the best possible return for its shareholders.
The bear hug strategy aims to turn an originally aggressive takeover into a pleasant, mutually beneficial takeover/merger. If successful, the method can minimize roadblocks and legal battles that are usual in hostile takeovers.
Refusal of a Bear Hug
The target company’s management may reject the bear hug for a variety of reasons. The company’s management may reject the offer if they truly believe it is not in the best interests of the company’s shareholders. However, unless declining the offer is absolutely justified, there are two potential issues.
If the management rejects the offer, the acquirer may go directly to the shareholders with a tender offer to buy the company’s stock at a premium to the market price. The acquirer proposes to buy all the company’s shareholders’ shares at a price that gives them a significant profit.
2. A legal action against the company’s management
When management cannot justify their decision to reject such a lucrative offer, shareholders have the option of suing them.
The board of directors, once again, has a fiduciary duty to serve the best interests of stockholders.
Example of a Bear Hug in Real Life
Microsoft made a publicly announced Bear Hug acquisition attempt for Yahoo in 2008, paying a 63 percent premium. The entire value of the deal was $44 billion.
Because Yahoo was trying to keep up with its business, this bargain was accepted. As a result, the Bear Hug Acquisition was a success.
Conclusion
The name “bear hug letter” refers to the offering business’s persuasiveness in making an unduly generous offer to the target company. The offering party can usually get an acquisition agreement by offering a price that is significantly more than the target company’s current value.
Some bear hug letters are kept from public view and are sent in confidence, hoping to bring a company to the negotiating table. We know those as teddy bear hugs.
References
- efinancemanagement.com – Bear Hug – Meaning, Bear Hug Letter, Advantages, Disadvantages, and Example
- corporatefinanceinstitute.com – What is a Bear Hug?
