Updated Feb 10, 2024
A bear hug is a term used to describe a hostile takeover strategy where the potential acquirer offers to purchase the stock of another company for a much higher price than what the target is actually worth. By presenting such a generous offer, the acquirer hopes to acquire the company at a price that is higher than what other bidders are willing to pay.
While seeming counterintuitive to traditional M&A strategies that incorporate thorough valuation in order to mitigate risk, a bear hug approach helps to eliminate the issue of competition from other bidders. A bear hug also makes it difficult for the target company’s management to reject the offer.
Bear hug offers tend to be surprising and unsolicited. This means the offer is usually made when the target company is not actively looking for a buyer. If the acquirer believes there is enough value in the target company, they will have their management make an offer to the board of directors of the target company. Again, this offer is generally made even if the target company has shown no indication they are willing to be acquired by another company.
How a Bear Hug Works
A “bear hug” is, physically, the act of putting one’s arms around another person in such a way that they are held very tightly and probably not able to escape from the hug — or even breathe easily.
As a metaphor for the world of M&A, the bear hug strategy is designed to render the target company virtually incapable of escaping the takeover attempt. Essentially, a bear hug is a form of a hostile takeover attempt.
However, there is an underlying key benefit. This benefit is that the offer is designed to put the target company’s shareholders in a stronger financial position than they were before the takeover. In other words, despite it technically being a hostile takeover, the purchase offer is still quite attractive.
As previously mentioned, the acquirer makes an offer to the target company that is far more generous than what the company would expect if it were looking for a traditional buyer.
Because the target company’s board of directors is legally obligated to act in the best interests of the shareholders, the management is unable to reject such an offer that would create substantial value for the company’s shareholders. If the board fails to accept the offer, they could potentially face lawsuits from shareholders who were deprived of the opportunity to receive a maximum return on their investment.
If the directors are reluctant to accept the offer, the acquirer may even choose to present the offer to the shareholders directly.
Since bear hugs can be a costly strategy for the acquirer, they occur by definition when the target company’s board has either rejected or would be expected to reject such an advance, necessitating a direct appeal to the target company’s shareholders.
Bear hugs can also force the targeted company’s leadership to explain why the bid — to say nothing of the market — undervalues their stock, and what the company intends to do about the low valuation. As such, a bear hug approach puts incumbent management on the defensive and focuses attention on the company’s perhaps undervalued share price.
Examples of Bear Hugs
As mentioned, a bear hug can happen when a company’s stock is currently undervalued. There could be several reasons for this, such as the company having recently fallen on hard times.
Nonetheless, in addition to a potentially mispriced stock, the acquiring company initiating the bear hug takeover strategy places a high value on the targeted business. Perhaps there are undervalued assets the target company is sitting on, that are not reflected in the company’s stock price or business performance.
Elon Musk’s unofficial offer to buy Twitter in April 2022 at an 18% premium to its market value but a 22% discount to Twitter’s share price a year earlier was described as a bear hug hostile takeover.
Earlier examples include:
- Xerox’s pursuit of HP in 2019; a bear hug hostile takeover attempt by Exelon to acquire NRG Energy in 2009
- Microsoft’s bear hug of Yahoo in 2008.
None of those efforts ultimately succeeded, notes Investopedia.
The Reasons for a Bear Hug Takeover
Though it is too early to tell if Elon Musk’s Twitter bear hug has been a success or failure, it’s clear that these types of takeovers can be risky.
There are essentially two reasons why investors and companies prefer using a bear hug takeover strategy rather than other forms of takeovers. Let’s have a look at these.
1. Limit Competition
When a company looking to be acquired makes it known — even among a small set of investment bankers and other companies in its industry — there are likely to be multiple interested buyers. The goal of any potential buyer will almost always be to secure the target company at the best possible price.
When an investor or company decides to pursue a bear hug takeover, the investor or company offers a price that is well above the fair market price. This discourages other bidders from attempting to pursue the takeover, thereby clearing the way for the bear hug acquirer.
2. Avoid Confrontation with the Target Company
A bear hug hostile takeover is usually attempted when the management of a target company is reluctant to negotiate and accept any offers to acquire their company. The alternative option is to go directly to the target company’s shareholders for their approval.
When choosing a bear hug acquisition, the acquirer is deciding to take a softer approach, by presenting a generous offer that the management of the target company will most likely be receptive to. This applies even if they hadn’t actively been thinking about being acquired by another firm. The target company’s management is under a fiduciary responsibility to generate the highest return for their shareholders, and so the target company must take the offer seriously.
The ultimate goal of the bear hug strategy is to convert an initially hostile takeover into a friendlier, agreed-upon takeover/merger. If you know how to prep for an M&A hostile takeover, this strategy can eliminate the obstacles and legal disputes that often happen during hostile takeover acquisition.
Streamline Bear Hug Takeovers with CapLinked
M&A due diligence includes hundreds, sometimes thousands, of documents that need to be reviewed. Indeed, for bear hugs and other unexpected hostile takeovers, there might be a whole new set of participants who suddenly need access to documents—and quickly.
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Jake Wengroff writes about technology and financial services. A former technology reporter for CBS Radio, he covers such topics as security, mobility, e-commerce and the Internet of Things.
Sources:
- Investopedia. Bear Hug: Business Definition, With Pros and Cons. https://www.investopedia.com/terms/b/bearhug.asp
- Bloomberg. Sure Elon Musk Might Buy Twitter. https://www.bloomberg.com/opinion/articles/2022-04-15/sure-elon-musk-might-buy-twitter
