Bear Hug in Finance & Business

Written By:
Adiste Mae

What is a Bear Hug?

In the world of finance, a bear hug is used to describe a hostile takeover strategy that is so generous, shareholders are more inclined to accept than decline.

To use the bear hug strategy, the potential acquirer must make an offer to purchase the stock of another company at a price much higher than what the stock is actually worth.

This generous offer is made to exceed what any competition may offer and to make it hard for the company to decline the offer.

By offering to purchase the target company for a price much higher than it is worth, the offering party can usually gain an acceptance and win the takeover.

Bear hugs are usually unsolicited and that is why they are described as a type of hostile takeover strategy.

Why use the Bear Hug Takeover method?

Even though a bear hug is considered a hostile takeover strategy, it is much more financially favorable to shareholders, making it hard for the target company to decline.

The bear hug method is used to avoid more-confrontational forms of takeover and to reduce or eliminate any competition for the same target company.

Even though bear hugs offer financially favorable results for the shareholders, they are often unsolicited and quite often a surprise.

In physical terms, a bear hug is the act of wrapping your arms so tightly around another person that they are unable to escape or get out of the hug.

In terms of a company being acquired, the bear hug strategy is structured in a way that the target company is likely unable to escape the attempt at a takeover.

Here are two main reasons why the bear hug method is used in mergers and acquisitions:

Limits competition

As mentioned above, the bear hug strategy makes such a generous offer, that is weeds out potential competition.

Offering a price well above market value discourages other buyers from making offers or competing for the target company.

Less confrontation with target company

Hostile takeovers are often done when the target company has refused previous offers to acquire their company.

A target company is more likely to accept an offer that is above market value, and therefore, it can be a smoother acquisition.

Furthermore, the target companies board of directors has a fiduciary responsibility to act in the best interest of its shareholders, making it problematic to refuse an offer that increases their return on investment.

What if the Bear Hug is rejected?

The takeover part of a bear hug is hostile because it is often unsolicited, but the purchase offer is friendly and generous.

A bear hug intends to leave the target company’s shareholders in even better financial positions than they were in before.

The Board of Directors of a company is legally obligated to act in the best interest of its shareholders, which means that management is not likely to be able to reject an offer that brings such substantial value to the company.

If the bear hug is rejected, the board risks attracting lawsuits form shareholders who feel they have missed out on an opportunity to receive the generous financial benefits of the bear hug offer.

In other words, they could sue the shareholders from depriving them of a higher return on their investment.

If the board of director has any doubts about accepting the offer, it is wise for them to present the offer as well as any concerns, directly to their shareholders in a shareholder meeting.

If a bear hug is rejected, the following may occur:

Offer is made directly to the shareholders

In the absence of a commitment to sell, the interested party can make an offer directly to the shareholders.

What this means is that the acquirer approaches each shareholder and offers to buy their shares at above market price.

This gives the shareholders a higher return on their investment and gives the acquirer ownership of the company.

While the board of directors and management can make recommendations to the shareholders to reject the bid, it is ultimately their decision.

Lawsuit against management

If the board of directors and management choose to decline a bear hug offer, they need to have good reason to justify why the decision is in the best interest of the company.

If they cannot justify their decision, they risk litigation from shareholders who feel they missed out on an opportunity for a bigger return on their investment.

Is a Bear Hug Sale inevitable?

This may leave you wondering if there is any way out of a bear hug?

Being approached by a potential bidder with an offer does not mean the target company must immediately agree and put itself up for sale.

The board of directors has a legal fiduciary duty to act in the best interest of the company, which means there could be reasons to reject even the most generous of offers.

For example, the offer may come right after a period when the stock markets are generally down or the target company is just coming out of an unusually bad quarter or period.

The target board may decide that it is not the right time to accept a bid because they feel that their value will be higher in the next period.

These are things they can discuss with their shareholders to gain agreement on before making a final decision to sell or not.

However in the end, if the board of directors and managers decline a bear hug offer, the bidder is free to go directly to the shareholders, and ultimately the shareholders can decide to keep or sell their shares.

Bear Hug Takeover Examples in M&A

To help us tie all of this information together, let’s use two real life examples of bear hug acquisitions.

Example #1: Microsoft and Yahoo

In 2008, Microsoft presented Yahoo with a bear hug letter offering to buy their shares at a 63% acquisition premium.

At that time, Yahoo was struggling, which made this offer even more appealing to shareholders at that time.

Example #2: Facebook and Whatsapp

In February of 2014, Facebook made an announcement that they were planning on acquiring Whatsapp with a very generous offer.

Whatapp founders were asking for a purchase price of $16 billion and Facebook ended up paying $19.6 billion for the acquisition.

Of the $19.6 billion, a portion was paid in cash while another portion was offered as Facebook shares.

The acquisition of Whatsapp by Facebook made it one of the largest acquisitions in US history, and an offer that Whatsapp could not refuse.