A bear hug is an offer to acquire publicly traded shares at a price significantly above the current market price, made with the intention of attracting the attention of the shareholders of the target firm.
It’s a method of making an acquisition when the target company’s board of directors is hesitant to do so. The term “bear hug” is meant to convey both the force and the unexpectedness of such an offer.
The bear hug bidder makes it impossible for the board of the acquisition target to say no by paying a price far higher than the company’s market worth. Here you will find out what is a bear hug in business.
What Is a Bear Hug?
In a bear hug, the potential acquirer offers to buy the target firm’s stock at a considerably higher price than the value of the target company would suggest the stock is worth on the open market.
The potential buyer offers a high sum to buy the business, higher than any other bids so far. This not only reduces the risk of losing out to other bids, but also makes it more challenging for the management of the target company to reject the offer.
A bear hug is a form of hostile takeover in which the potential acquirer offers to buy the target company’s stock at a considerably greater price than the target is actually worth. An overly generous offer to purchase the company is made by the acquirer.
This not only reduces the risk of the offer being rejected by the management of the target company, but also helps eliminate the problem of competition from other bidders.
Understanding Bear Hug
Because the offering firm is so generous with its offer, even though it wasn’t specifically requested by the target company, the offer has persuasive overtones. Since the offer amount is attractive and higher than the current value of the company, most target companies will consent to the acquisition when presented with a “bear hug.”
Most of the time, the offer is in the best interests of the existing shareholders, thus the target firm and its management feel obligated to accept it. Bear hug acquisitions are similar to aggressive takeovers, but the significant value they bring makes them better for shareholders.
If the target firm rejects the offer, the company’s decision may raise questions about its loyalty to its shareholders. A firm may attempt a bear hug in order to avoid more aggressive forms of takeover that could be disruptive to business as usual and entail an excessive amount of paperwork and red tape.
From the point of view of the acquiring firm, a bear hug can facilitate strategic integration of the target’s business with its own, or it can assist wipe out competition.
How It Works
Physically, a “bear hug” consists of wrapping one’s arms around another person in such a way that they are held very closely and, most likely, cannot “escape” the hug. It is the goal of the bear hug approach, which is used in M&A, to make it such that the target business can’t easily avoid being acquired.
Once again, the acquirer makes an extremely generous offer to the target company, significantly more than the price the company would likely receive if it were actively seeking a buyer.
Considering the board of directors’ fiduciary duty to make decisions in the shareholders’ best interests, management has no choice but to accept an offer that will significantly increase the value of the company to its stockholders.
Bear hugs are a sort of hostile takeover but are intended to benefit the target company’s stockholders more than they would otherwise. That is to say, while the takeover itself may be hostile, the offer to purchase the company is quite friendly.
Investors who stand to lose out on the highest possible return on their money due to the board’s refusal to accept the offer may sue. The acquirer may go around the board of directors and deliver the offer to the shareholders if they are hesitant to accept the deal.
Reasons for a Bear Hug Takeover
There are a number of advantages to a bear hug takeover strategy that make it attractive to many businesses.
1. Limit Competition
When it becomes public knowledge that a company wants to be acquired, numerous suitors will certainly emerge. The prospective purchasers want to acquire the target company, but they want to do so at the most advantageous cost.
Companies that opt for bear hug takeovers typically bid significantly more than the stock’s value suggests. This scares away potential suitors, essentially clearing the playing field for the bear hug acquirer.
2. Avoid Confrontation With the Target Company
When the management of a target firm is hesitant to accept an offer to acquire it, the acquiring corporation may resort to a hostile takeover. Another option is to go straight to the shareholders for backing, or to try to replace the company’s management or board of directors.
Conclusion
By “bear hug,” we mean an offer to buy another company’s stock at a price far above its current market value. Some companies adopt the “bear hug” approach of acquisition when the other company’s owners or management are eager to sell.
Bear hugs are hostile takeover attempts, but they aim to improve the financial situation of the target’s current owners. In addition to a large cash payment, the acquiring firm may also present other inducements for the target to accept the acquisition.
It may take some time for the acquiring corporation to recoup the costs of a bear hug acquisition. Hope you are aware what is a bear hug in business.