In business, there is a term that best describes an unsolicited offer by one company to buy another at a relatively higher price than its actual market value. Usually, this term; ‘bear hug’ is hostile in the sense that the target company hadn’t indicated before of acquisition of being acquired.
That assumed value is the basic reason the offering business agrees to pay more for the target company than what it is worth.
What is a Bear Hug in Business: Definition
It’s known as a bear hug when a corporation makes an offer to buy another company at a value that is substantially higher than its market worth.
It’s an acquisition method that firms employ when they’re unsure whether the target company’s management or shareholders would sell. The other party that’s offering may propose a higher offer through an acquisition agreement.
And, because the acquisition agreement is legal, the company won’t have any choice but to accept such a substantial offer.
Why the Term Bear Hug?
A bear hug is when someone physically wraps their arms around another person so tightly that the “hugged person” cannot escape or flee.
If you generalize this to business, a bear hug is an acquisition offer made by one company to another with terms that make it exceedingly difficult for the target company to back out.
The acquirer makes it difficult for the target to ‘escape’ the hostile takeover by making the purchase offer so appealing that the target company’s board of directors may find it impossible to refuse it or to get rid of any potential competitors vying for the same target.
How does Bear Hug in Business Work?
The bear hug approach is used to make the target company nearly incapable of resisting the takeover effort.
However, because a bear hug causes the acquirer’s willingness to pay more than the target company’s market worth, the offer puts the target company and its shareholders in a better financial state than it was before the takeover.
As a result, while the offer is officially for a ‘hostile’ takeover, the offer’s essence is relatively ‘friendly’ to the target.
When an extremely appealing offer is made to a target company’s board of directors, they are put in a difficult situation and have little to no reason they shouldn’t accept the offer.
Because the hostile offer provides value for the company’s owners, the board can either accept it or proceed with the corporate bear hug or reject it and face a lawsuit from the shareholders.
Causes of a Bear Hug Takeover in Business
Some reasons businesses prefer to use a bear hug takeover strategy over other types of takeovers are:
#1. Limited Competition
The possibility of having many bidders for a company when there’s a public disclosure is high. So, potential competitors will strive to gain the said company at the greatest workable price.
Also, when a business pursues a bear hug acquisition, the price it offers which is far higher than the fair market value deters other competitors from attempting to gain the same company, effectively setting the coast clear for the bear hug acquirer.
#2. Avoid Getting into a Fight with the Corporation
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.
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What Happens if the Said Company Rejects the Bear Hug Offer?
There are sincere reasons the said company may not give in to the bear hug. Maybe, the management feels the deal is not in their shareholders’ best interest. And, unless there is a cogent reason there is a decline.
The following are likely to happen if a company’s board of directors rejects a bear hug offer.
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 Lawsuit Against the 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.
Pros and Cons of a Bear Hug in Business
Pros
- It may be a good deal for shareholders: shareholders benefit when a bear hug is accepted since the offer comes at a significant premium.
- Limits the gaining company’s bidding competition: As common sense implies, an offer that values a company at a significantly higher price than the current market rate will deter other corporations from bidding because they may not be able or willing to compete.
- Avoids a conflict with the target company: Management has a responsibility to maximize shareholder returns. When a bear-hug offer comes along, it may be tough for the target organization to refuse it because of this.
Cons
- If the target company rejects the proposal, it may cause a lawsuit: When yahoo rejected Microsoft, it faced shareholder lawsuits. These lawsuits arose in part because of how the shareholders watched the management pass on a deal that could have been profitable to all of them.
- It’s costly to carry out: The company or business making the bear hug takeover offer may end up spending more than it would have if it had used a more traditional bidding process to reduce or eliminate competitors and negotiate a relatively speedy agreement.
What is a Bear Hug Letter?
A bear hug letter is a written offer delivered by one firm to the board of directors of another company stating the terms and conditions under which it wants to buy the company. It is sent either as a private communication or a public declaration.
When it is received, it is the duty of the target company’s board of directors to properly assess the offer and decide.
Conclusion
The rationale behind acquiring a business at a more market value is that the gaining business has a strong desire to make the target’s board of directors find it impossible to refuse its offer.
The name ‘bear hug’ comes from the fact that the offer is so generous that the target organization cannot refuse it. I hope this post clarified what a bear hug is in the business world.
References
- Investopedia – Bear Hug
- Thebalance – What is a Bear Hug in Business?
- Investmentu – What is a Bear Hug in Business?
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