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What Exactly Is A Bear Hug?

Feb 12, 2024 By Triston Martin

A bear hug is an offer to acquire a publicly traded firm at a price far over the stock's current market value. 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" conveys such an offer's force and unexpectedness. Bear hug bidders make it challenging for the board of directors of the acquired firm to say "no" by providing a price far more than the company's market worth.

Comprehension of Bear Hugs

The purchase proposal must represent a significant premium above the stock price of the target firm to be considered a bear hug. Refusing a hefty premium might lead to shareholder activism in litigation, proxy contests, or other legal action against the board of directors.

When the board of directors of the target firm has rejected or is widely expected to reject an acquisition offer, the acquirer may resort to a "bear hug," an expensive technique that involves appealing directly to the target company's shareholders.

A bear hug will need the management of the target firm to explain why the bid, let alone the market, undervalues the company's shares and what the company plans to do about it.

Bear Hugs in Business: How They Work

The tactics of a bear-hug purchase deal are laid bare in Microsoft's bid for Yahoo! An method where the offeror approaches management regarding an acquisition while simultaneously declaring its offer for the target's shares," as explained in a study on activist debtholder takeover attempts written by a University of Maryland law professor.

This strategy might also be employed as an intimidating threat to upper management. In other words, the high bidder utilizes a public declaration of intent as a bargaining chip. This reminds me of the press statement Microsoft issued in 2008 when it offered to acquire Yahoo!

Examining the Pros and Cons of a Bear Hug

By embracing the target firm physically or "bear hugging" it, an acquirer might circumvent the target company's board to deliver its proposal to shareholders. The existing management and board may try to negotiate a white knight transaction with another bidder seen as more acceptable.

This is terrible news for the pursuer because it reduces the likelihood of cordial negotiations. Bear hugs are good for shareholders since they increase the possibility of a higher share price being offered to the company's existing shareholders.

The board and management of the firm are under pressure to accept a higher offer per share than the bear hugger has proposed, even if the embrace does not result in an immediate contract.

Reasons for a Bear Hug Takeover

Some of the following are examples of why firms above other types of appropriations prefer bear hug takeovers:

Limit Competition

It's conceivable that several buyers will compete for a firm that has made it public that it wants to be bought. All potential purchasers wish to purchase the target firm but want to do so at the lowest feasible price.

A bear hug takeover is characterized by an excessively high purchase price offered by one firm to another. As a result, potential suitors are deterred from pursuing the seizure, and the field is cleared for the bear hug acquirer.

Avoid Conflict With The Target Firm

When the management of a target firm is hesitant to accept an offer to purchase the business, the company attempting the acquisition may resort to an aggressive takeover strategy. You might also try going straight to the shareholders for backing, or you could try to replace the company's management or board of directors through some shareholder revolt. D

uring a bear hug, the acquiring business takes a more friendly tack by making a substantial offer to the target company's management, which they are more than likely to accept even if they weren't considering an acquisition.

Rejection Of A Bear Hug

The target company's management sometimes turns down the bear hug. The administration may reject the offer if it is not in the shareholders' best interests. Two significant issues might develop if you turn down the request without a good reason.

Acquirer Tenders To Shareholders

If the company's management turns down the offer, the acquirer may go straight to the shareholders with a tender offer to buy their shares at a premium. The acquirer makes a generous offer to all of the company's stockholders, allowing them to make a tidy profit.

A Lawsuit Against Management

Shareholders can sue management for failing to maximize shareholder value by accepting and rejecting a generous offer. The board of directors, once again, owes a fiduciary duty to the company's investors.

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