Businesses use a variety of tactics to conduct profitable business transactions, including acquisitions, and business owners may be interested in what a bear hug is.
Businesses can negotiate broadly with other companies by using a tactic called a bear hug. Knowing how to use this tactic might give you the assurance you need to approach discussions.
In this article, we define what a bear hug is in business, the pros and drawbacks of using it, and give an example of how it functions.
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What is a Bear Hug in Business?
A bear hug is a hostile takeover tactic in which a potential acquirer proposes to pay significantly more than the target firm is truly worth its stock in another company.
The potential buyer generously offers to buy the business for more money than other potential buyers are prepared to offer.
This makes it more difficult for the target company’s management to reject the offer while also helping to eliminate the issue of competition from other bidders.
They typically make the offer when the target company is not actively looking for a buyer because it is frequently unsolicited.
The management of the acquirer submits a proposal to the target company’s board of directors because they believe the target business has value.
Even if the target company has expressed no interest in being gained by another business, this is still true.
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How Does it Work?
Physically, giving someone a “bear hug” involves wrapping one’s arms around them so tightly that the recipient is likely unable to “escape” from the embrace.
The bear hug approach is used in mergers and acquisitions to make the target business almost unable to resist the takeover effort.
Once more, the acquirer offers the target firm a highly generous offer that is significantly higher than what the business would likely typically receive if it were actively seeking for a buyer.
The management is unable to reject such an offer that generates significant value for the shareholders of the firm since the board of directors is required by law to act in their best interests.
A bear hug is a type of hostile takeover effort, but its goal is to leave the shareholders of the target company in a better financial situation than they were.
In other words, the purchase offer is extremely friendly despite the fact that the takeover itself may be aggressive.
If the board rejects the offer, shareholders who would otherwise be denied the chance to maximize their investment returns may file lawsuits against the board.
The acquirer may decide to make the offer straight to the shareholders if the directors are reluctant to approve it.
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What are the Reasons for a Bear Hug Takeover?
Some of the explanations why businesses favor a bear hug takeover approach over alternative takeover methods include the following:
1. Limit Competition
If a company is trying to be acquired and it is known to the public, there are probably several potential purchasers.
The target company will be acquired by the prospective purchasers, but obviously at the most advantageous price.
When a business decides to go after a bear hug takeover, it proposes a price that is far more than the going rate.
This puts off potential rival bids from trying to acquire the company, opening the way, so to speak, for the bear hug acquirer.
2. Keep your distance from the target company.
Because the target company’s management is averse to accepting an acquisition offer, companies try a hostile takeover.
The option is to directly approach the shareholders and seek their approval, or to battle to have the company’s management or board of directors replaced.
In the case of a bear hug, the potential buyer adopts a softer strategy by making a generous offer that the target company’s management is likely to accept, even if they weren’t actively considering being gained by another company.
The management of the target company has a fiduciary obligation to maximize return for shareholders.
The bear hug strategy seeks to, ideally change the hostile takeover into a friendly, mutually beneficial takeover/merger. If implemented successfully, the plan can do away with the difficulties and legal issues that typically arise in hostile takeover acquisitions.
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Why can a Bear Hug be Rejected?
The target company’s management may occasionally reject the bear embrace for a variety of reasons.
The management could make the decision to reject the offer because they firmly feel it is not in the best interests of the company’s shareholders.
However, two major issues can surface unless declining the offer is actually justified.
1. The acquirer approaches the shareholders with a tender offer
The buyer may approach the shareholders directly with a tender offer to buy the company’s shares at a premium to the market price if the management rejects the offer.
They offer every stakeholder of the company the opportunity to sell their shares to the acquirer at a price that will make them a sizable profit.
2. Legal action taken against management
Shareholders may sue management if management is unable to defend their decision to decline such a lucrative offer. Once more, the board of directors has a fiduciary duty to act in the stockholders’ best interests.
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What are the Advantages and Disadvantages of a Bear Hug?
A bear hug enables the acquirer to bypass the board of the targeted company and deliver its offer to shareholders directly.
The drawback for the pursuer is that the strategy is unlikely to lead to cordial discussions with the board and management of the target company, who may instead look to strike a deal with a different, more agreeable buyer as a white knight.
The possibility of a higher share price being offered benefits shareholders of a company receiving a bear hug.
A bear hug puts pressure on a company’s board and management to raise the share price above what the bear hugger is willing to offer, even if it doesn’t result in a speedy agreement.
Unfortunately, a bear embrace signifies that the current board of directors and management are not open to a cordial agreement.
And short of a formal tender offer, a bear hug won’t be able to break through that reluctance.
If successful, a bear hug has the power to divert managers and directors of the targeted organization, ultimately harming the company’s business and all stakeholders, including the bear hugger.
A bear hug calls attention to the company’s present management and shares price, either directly or indirectly.
New owners might fire current managers if the bear hug ultimately succeeds. They might have to be satisfied with the golden parachutes that their executive compensation agreements’ change-of-control clauses will probably activate.
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What are the Benefits of a Bear Hug in Business?
The bear hug technique is a forceful acquisition strategy that can successfully lead to discussions. The bear hug approach has various advantages for both the acquiring and target companies, including:
Benefits for the acquiring company
- Ability to retain control of the negotiations: An gaining business can keep control of the negotiations because it is the one making the offer. By making a sizable offer, the purchasing business could be able to decide what conditions they should include in the contract or what other perks should be part of the purchase package.
- Gain of valuable assets: It’s typical for the purchasing firm to think that a deal of this nature will benefit them. Gaining valuable assets through a successful purchase is likely to boost the worth of the acquiring firm by enabling it to grow its operations and incorporate a new good or service.
- Streamlined acquisition process: This reduces the need to outbid rivals or engage in negotiations with the target company. By gently encouraging a target company to sell, a bear hug tactic can speed up the acquisition process.
- Chance of making an acquisition agreement increases: The chances that the target will accept the deal and the top offer increases when a company makes an offer that is significantly higher than the target’s value.
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Benefits for the target company
- Increased return on investment for shareholders and investors: With a high offer, shareholders and investors have a greater chance of realizing a high return on their initial investment. Deals of this kind are often best for all parties involved.
- Potential for additional incentives in the acquisition agreement: In order to persuade the target company to accept the acquisition, the acquiring company may include additional incentives in its offer. The target business might, for instance, demand hefty severance payments for its workers.
- Capacity to bargain for specifics of the deal: Because a bear hug offer severely restricts the target’s ability to refuse the offer, they might choose to bargain for certain benefits. For instance, the target company might bargain for greater salaries for its workers during the course of the acquisition, which might lead to a higher payoff for the target company.
- Simplified bidding and acquisition process: Even though the target company wasn’t selling, having just one buyer makes the bidding and acquisition process much simpler because it eliminates the need for management to analyze and evaluate many proposals.
Frequently Asked Questions
A bear hug letter is a letter that makes a purchase offer to the target’s board of directors or management at a price significantly higher than the target’s existing value. The typical sender of bear hug letters is a hostile buyer who has worries about the target’s management’s willingness to sell.
Bear hugs are hostile takeover tactics, but because they are far more financially helpful to shareholders, it is difficult for the target business to reject one.
The bear hug takeover technique avoids more confrontational takeover techniques and lessens or obliterates any rivalry from the same target company.
The target company does not have to accept the offer made by a potential buyer and list itself for sale right away.
The board of directors may turn even the most substantial bids down since they have a legal obligation to act in the company’s best interests.
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Conclusion
In business, a bear hug is when one company makes an acquisition offer for another that is significantly more than the share price of the target company.
This is a calculated strategy to put the target company’s management in a bind and force a purchase rather than face legal action and disgruntled shareholders.
Despite being significant bids, they don’t always result in profitable acquisitions. Investor lawsuits may follow a bear hug rejection, as was the case with Microsoft’s unsuccessful 2008 bid for Yahoo.
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