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Bear Hug

What Is A Bear Hug?

A "bear hug" is a buyout offer by one company for another that is so attractive that the target company has little choice but to accept it. Bear hug bids are usually well above the target company's prevailing market value and may include cash as an additional sweetener.

While bear hugs are almost always unsolicited, they are not considered to be hostile because the offer is so lucrative and promises to enrich shareholders of the target company. Indeed, the target company's board of directors risks lawsuits for not performing its required fiduciary duty to do what is in the best interest of stockholders by not accepting it. It also risks a hostile takeover attempt by the would-be acquirer.

An acquisitive company uses a bear hug for several reasons.

  • It wants to ensure that its offer will be accepted.
  • By making such an offer well above the current market price, the would-be acquirer wants to discourage any other potential suitors from making a competing bid.
  • It wants to avoid making a hostile offer, which can be even more expensive, create ill feelings, and may not be successful in the long run.

A bear hug may follow a private offer by the acquirer being rebuffed by the target company. The acquirer would then have to decide whether to go public with its offer, mount a hostile takeover, or simply abandon the effort.

If the offer is rejected, the acquirer may go over the target company's head and mount a tender offer directly to its shareholders to buy their shares. If it buys enough of the stock, the acquiring company might be able to force the target company to come to terms.

Disadvantages

While a bear hug offer stands a good chance of being successful, it may be a mixed blessing for the acquirer. The offer may be so costly that it could take years before the acquiring company begins to make an acceptable return on the investment, which could have a negative impact on its own stock.

Also, a bear hug may be good for the target company's shareholders, but it may not be as good for its management and employees. They could stand to lose their jobs if they are being acquired by a company in the same industry and the consolidation involves redundancies.

Summary

A bear hug is a corporate takeover tactic in which the acquiring company makes an offer to buy another company that is so much higher than the target firm's prevailing market price that it has little alternative but to accept it. Acquiring companies use bear hugs to increase the chances that their offer will be accepted and to discourage any competing bids. Target companies that reject the offer risk being sued by their own shareholders for failing to act in their best interest.

Disclosure