In general, the term ‘bear hug’ refers to a tight or enthusiastic hug that is often warm and friendly. But in the context of business, a bear hug is anything but friendly.
A bear hug is an offer to acquire a business at a price higher than average offers. In most cases, this type of offer is public and often made without the board’s consent. It’s a business acquisition strategy that pressures reluctant businesses to accept a bid or risk upsetting their shareholders.
Bear hugs sound like hostile takeovers and in most cases, they are. While no business wants to be on the receiving end of a bear hug, concerns on finance and management often call for this acquisition tactic. But when is a bear hug necessary in business? How do they work? Are they even legal?
What is a Bear Hug?
By definition, a bear hug is a hostile takeover technique where an acquiring business offers to buy the stock of another business for a higher price than what the target company is actually worth. Simply put, the acquirer makes a generous bid to buy the business at a price that exceeds the offers of other bidders. This eliminates the problem of competition and makes it difficult for the target business’s management to refuse the offer.
Most of the time, the offer is unsolicited, which means that it was made at a time when the target business wasn’t actively seeking buyers. The acquirer’s management makes an offer to the board of directors of the target company, insisting that they see value in that business. This holds true even if the target business has not shown any willingness to be acquired.
Why is it Called a ‘Bear Hug?’
Physically, a ‘bear hug’ is the act of putting your arm around another person in a way that you’re holding them tightly. In some cases, they might not be able to escape the hug. In wrestling, a ‘bear hug’ (aka a body lock) is a maneuver that involves wrapping your arms around the opponent with one (or both) of their arms pinned to their body. The hands are locked around the opponent and the wrestler performing the bear hug holds the opponent tightly to their chest.
Both acts symbolize the concept of a bear hug in business: you’re basically putting your arm around another business to acquire them. This acquisition technique puts the target company’s management on the defensive and focuses all the attention on the business’s share price.
A popular example of a bear hug is Elon Musk’s offer to purchase Twitter in April 2022. The tech giant offered to buy the company at an 18 percent premium to its market value.
While many bear hug techniques work, they don’t always succeed. Take Microsoft for example. In 2008, the company made an acquisition offer for Yahoo! Microsoft’s offer was 62 percent higher than the closing price of Yahoo! stock. However, the deal didn’t push through.
How Does a Bear Hug Work in Business?
In the area of acquisitions and mergers, bear hugs are designed to render the target business incapable of escaping the takeover. As mentioned above, the acquiring company makes a generous offer to the target business. The offer is often more than what the targeted business would expect if they were actively looking for buyers. Since the board of directors must always prioritize the shareholders’ best interests, the management can’t resist the offer since it offers value for their shareholders.
While a bear hug is a form of hostile acquisition technique, it is often done to leave the target business’s shareholders in a better position financially. The takeover might be hostile, but the purchase is for everyone’s good. If the board doesn’t accept the offer, shareholders can file a lawsuit against them since they are unable to receive maximum returns on their investments. If the target company’s board is reluctant to accept the offer, the acquirer can present the proposition to their shareholders instead.
Let’s go back to the Microsoft and Yahoo deals. The acquisition attempt was made public, which made it seem that the approach was also a scare tactic. The press release that announced Microsoft’s bid for Yahoo! seemed to make things difficult for the latter since the release pointed out the premium carried by the offer. The release also reported that Microsoft was willing to work closely with Yahoo!’s management.
Basically, the offer is designed in a way that the board can’t refuse it. However, Yahoo! refused the offer and was sued by angry shareholders.
Why Do Bear Hugs Happen in Business?
Why do companies use the bear hug technique? Here are some reasons.
- Avoid confrontation with the targeted company. Businesses attempt hostile takeovers because the management of the targeted business is hesitant to accept an offer of acquisition. The alternative approach is to directly appeal to the shareholders or to replace the board of directors or management. Bear hugs are a more ‘gentler’ approach to such takeovers. It offers a generous amount to the management of the targeted company. This way, the target company is likely more receptive to the offer, even if they hadn’t considered being acquired by another company. A bear hug’s goal is to convert hostile takeovers into a friendlier merger. If the attempt is successful, it eliminates legal disputes and obstacles that often occur in hostile acquisitions.
- Limit the competition. When companies hear of a target business looking to be acquired, there will be many interested buyers. Potential buyers would want to secure the acquisition at the best possible price. But when a business decides to purse a bear hug takeover, its offered price is above the fair market price. This keeps other bidders from pursuing the target company.
What are the Pros and Cons of Bear Hugs?
A bear hug technique lets acquirers present their bid directly to the shareholders, bypassing the target business’s management or board of directors. On the other hand, using this technique doesn’t always guarantee friendly conversations with the incumbent board. They might even propose a white knight deal with a buyer they consider more acceptable than the acquirer.
Bear hugs imply that the current board members aren’t interested in friendly deals. Without a formal tender offer, using a bear hug doesn’t always guarantee peaceful conversations.
If the bear hug pulls through, the incumbent managers might be ousted by new owners.
What Happens if a Bear Hug is Rejected?
Sometimes, the target company’s management rejects the bear hug for different reasons. They might not think the deal is genuine or they’re not a big fan of the acquiring company. When that happens, any of the following can happen:
- A lawsuit against the management. When the company’s board can’t justify its decision to reject the offer, the shareholders can file a lawsuit against them. After all, the management has a responsibility to serve the stockholders’ best interest.
- The acquirer directly approaches the shareholders. If the management rejects the offer, the acquirer can meet with the shareholders with a tender offer. The acquiring company can buy the shares from the shareholder of the company.
A bear hug done right can benefit the acquiring company and the target company’s shareholders. If unsuccessful, there are problems that will arise.