When a potential buyer seeks to acquire a company at a much higher price than the target company’s actual worth, a bear hug is experienced. It is an attempt to do a hostile takeover of the company. The bear hug strategy pressurizes the company to accept the proposal with the risk of losing the board’s confidence.
As the term suggests, a bear hug is putting your arms around another person so tightly that they can't escape. A generous offer is publicly announced without permission from the company’s board.
A bear hug strategy is designed to attract shareholders with the offer of increased share value. The shareholders, thus, pressure the company board to take the deal. The target company's management is under a fiduciary responsibility to generate the highest return for their shareholders, so the shareholders have a legal right to sue the company for not taking the acquisition offer.
Bear hugs usually happen when a company is struggling and the stocks have fallen in value. It also implies current management and board members' resistance towards a friendly deal. It often results in an acquisition but costs the acquirer much more than a typical deal. After a successful deal, the current management is ousted by the new owners.
Famous Examples of a Bear Hug
Elon Musk’s Acquisition of Twitter
It's easier for us to understand this as we have recently experienced a textbook example of a bear hug in the Elon Musk Twitter case. Elon Musk began buying shares of Twitter at the start of 2022 and worked towards becoming the biggest shareholder.
Musk started the acquisition process in April by signing the deal to buy Twitter at $44 billion, over that target rate. He promised to upgrade Twitter's content moderation, promotion and transparency policies besides adding new features. In October 2022, Musk finalized the deal and became the owner. The move was followed by laying off top executives and, later, many other staff members.
Microsoft’s Intended Acquisition of Yahoo
Another iconic example of a bear hug acquisition was experienced when Microsoft tried to do a hostile takeover of Yahoo. Microsoft offered Yahoo to buy its shares at a 62% acquisition premium over what it closed the earlier day. The bear hug package was attractive for the shareholders of Yahoo as it was going through a downtrend at that point. This acquisition, however, didn’t go through.
Why Does a Bear Hug Takeover Happen?
Limit Competition
The buyer approaches the shareholders directly. This move is taken as a means to discourage other interested parties from bidding as it offers a price well above the fair market price, thus eliminating any other potential buyer from the field.
Shares Go Higher
The shareholders receive a benefit from such offers as the price goes up. When a bear call is rejected, a company is put under a boiler to better its share rates and recover from the takeover attempt.
Hard to Reject
A bear hug is rarely rejected because the offer is public, and the board is accountable to the shareholders for their decision. However, target company management rejects it if they can justify not taking the offer. Nonetheless, the board has to face a few consequences in that case.
Avoid Confrontation
A bear hug is triggered when the company refuses to accept any offer. The buyer company then directly approaches the company's shareholders to get the offer accepted.
What Happens When a Bear Hug Is Rejected?
The company’s board can reject such offers for legal and managerial reasons, but they are bound to accept it most of the time in the shareholder's interest. These are two consequences of rejecting a bear hug:
A Lawsuit Is Filed Against the Management
The case of declining a bear hug can be brought to court when most shareholders believe declining the offer is not for their benefit. In such a scenario, the management must justify how declining such an offer is in favor of the shareholders.
The Bear Hugger Directly Offers the Shareholders.
Another thing a bear hug acquirer does is bypass the board and present the offer directly to shareholders. The bear hugger offers to acquire the company at a value above the market price - a rescue that gives the shareholders the advantage of selling their shares at a higher value than the market price.
Drawbacks of a Bear Hug
Though a bear hug seems like the best option for an acquirer, it is not always the case.
Bear hugs cost a lot, and the acquirer faces a massive loss if the product fails to do better in the market.
To convince shareholders, the premium offered is often much higher than the company's worth and creates no value for the buyer.
Mostly, the entire management of the target company is replaced; thus, bear hugs are never favorable for the executive team of the target company.
Bear hugs are bitter and often involve lawsuits. The board doesn't cooperate with the acquirer even after closing the deal.