What is a Bear Hug?
A bear hug is a hostile takeover strategy where the acquirer makes an offer to buy that company’s stock at a premium than the target price. The acquirer makes a very generous offer as compared to the other bidders. This bear hug strategy helps eliminate any competition who is willing to bid for the shares and also makes it very difficult for the management to reject their offer. These offers are usually unsolicited, meaning that these offers are made even when the target company is not looking for a buyer. The acquirer’s company makes the offer to the board of directors when they are interested in buying a stake in the company. This is true even if the target company has not shown any interest to be acquired by another company. By accepting the bear hug offer, the offering party can usually obtain an acquisition agreement. Due to the generous offer, the target company’s management is forced to accept such offers as it is legally required by them to look for the best interest of the shareholders.
How does a Bear Hug work?
A “bear bug” is, physically, the act of putting one’s arms around someone in such a way that they are held very tightly and probably won’t be able to “escape” from the hug. In times of mergers and acquisitions, the bear hug strategy proves to be very effective as the target company is virtually incapable of escaping the takeover attempt. Again, this happens because the acquiring company makes a generous offer than what would ordinarily be offered to the target company. The board is unable to reject such offers as they act in the best interest of the shareholders as it creates a substantial amount for them. Although the bear hug is a form of a hostile takeover, it leaves the target company in a much better financial position than it previously was. The takeover may be hostile, but the purchase offer is very friendly. Failure by the board to accept the offer may attract lawsuits from their shareholders as they are deprived of getting maximum returns for their investment. If the board is reluctant is rejecting the offer, the acquirer may present the offer directly to the shareholders.
Reasons for a Bear Hug takeover
The following are the reasons why companies go for bear hug takeovers rather than other forms of takeover:
- Limit Competition:
When it is public information that a company is looking to be acquired, there are a lot of interested buyers. The potential buyers will aim to secure the acquisition of the target company at the best possible price. When an acquiring company decides for a bear hug takeover, it offers a price that is way high than the current market price of the target company. This discourages other buyers from attempting the takeover, thereby clearing the field for the bear hug acquirer.
- Avoid confrontation with the target company:
Companies attempt a hostile takeover when the management of the target company is reluctant to accept an offer to acquire their company. In such scenarios, the acquirer can directly approach the shareholders to get their approval or to replace the management or board of directors of the company.
Reasons for a Bear Hug
Many times, the management may reject the offer from the bear hug acquirer for a variety of reasons. The management may turn down the offer on the basis that they genuinely feel that the offer is not in the best interest of the shareholders. However, if the company is unable to justify the rejection of the takeover attempt, the following two potential problems may arise.
- Acquirer makes a tender offer directly to the shareholders:
If the management rejects their offer, the acquirer may approach the shareholders of the company directly to purchase the shares at an above-market price. This allows the acquirer to get the shares and the shareholders make a sizeable profit.
- A lawsuit against the management:
When the management is unable to justify the reason for the rejection of the offer, the shareholders may serve a lawsuit against the company’s management as the board has a fiduciary responsibility to serve the shareholder’s best interest.