What is a Bear Hug?
A bear hug is an acquisition strategy where one company offers to purchase another at a much higher price than that company’s valuation. It’s sometimes viewed as a hostile takeover, but it’s more beneficial for shareholders than most hostile takeovers would be.
Bear hugs typically occur at a time when the target company isn’t actively seeking a buyer — or even when a target company stated they’re not willing to consider selling. Potential buyers that have exhausted private means to purchase a target company may make an unsolicited public offer. This puts pressure on the target company’s board of directors to consider the bid as they have an obligation to provide the best possible financial returns to company shareholders.
Why would the acquiring company offer so much money?
The board of directors has a legal obligation to act in the shareholders’ best interests. This means that it’s very difficult for them to reject an offer that would create substantial value for the shareholders.
Because of this, a bear hug offer means the acquiring company will often be able to take over a target company that the directors were unwilling to sell.
Can the target company refuse a bear hug?
The management of the target company may reject a bear hug offer if they believe the deal isn’t in the shareholders’ best interests. If the shareholders disagree, though, they can file a lawsuit against the management.
Another issue is that if the company’s management rejects the offer, then the acquiring company can directly approach the shareholders. By offering to buy shares at an above-market price, they could buy up enough shares to have a controlling interest in the target company.
When do companies receive bear hug offers?
Bear hug offers typically target companies that are struggling financially, have high debts, or are unproven startups. However, this isn’t always the case.
Companies might be targeted with a bear hug offer if the potential buyer wants to avoid a bidding war. Companies that aren’t interested in selling might receive a bear hug offer when a buyer has a strong desire to acquire a target company.
Is a bear hug a risky strategy?
For the acquiring company, a bear hug is a risky strategy as it can take time to see a return on investment. There’s no guarantee that the target company will gain enough value to make the bear hug worthwhile.
What is a bear hug letter?
A bear hug letter is a letter to the target company’s management or board of directors that sets out the offer. In the case of high-profile takeover attempts, these may be released publicly.
A bear hug involves a buyer purchasing a target company at a price higher than the target company’s current valuation. It’s used for a variety of reasons, such as when multiple buyers are interested in a target company. In this case, offering a higher sum than the company is worth can avoid a bidding war. It’s also used to gain a competitive market advantage, such as when a buyer purchases a competitor for its desirable customer base or other assets.