Do you know what is a bear hug in business? When attempting a hostile takeover, one approach is known as a “bear hug,” in which the prospective acquirer offers to buy the target company’s shares at a significantly higher price than the target is really worth. The acquirer makes a high-priced proposal to buy the business, much above the offers of any other suitors. It also makes it more difficult for the management of the target firm to reject the offer, which helps to alleviate the issue of competition from other bidders.
The offer is often made while the target firm is not actively seeking a buyer, making it unsolicited. The management of the acquiring firm presents an offer to the board of directors of the target company. This is the case even if the targeted firm has never shown any interest in being purchased.
How Does It Work?
Physically, a “bear hug” is when one person wraps their arms around another person so firmly that the other person cannot move away from the embrace. The goal of the bear hug approach in M&A is to make the target firm so unattractive that it can’t possibly resist being acquired.
Once again, the acquirer makes an extremely generous offer to the target firm, far more than the price the company would likely get if it were actively seeking a buyer. Management would be unable to reject an offer that would result in significant value creation for shareholders since the board of directors is required by law to act in the best interests of the shareholders.
Bear hug takeovers are a sort of hostile takeover, although they aim to benefit the target company’s stockholders more than they would otherwise. To rephrase, the takeover in question may be hostile, but the offer to buy out the current shareholders is rather amicable. If the board decides against accepting the offer, shareholders who would have otherwise received a higher return on their investment may sue. If the board of directors rejects the offer, the buyer might bypass them and go straight to the shareholders.
Reasons For a Bear Hug Takeover
Some of the following are examples of why bear hug takeovers are preferred by businesses:
#1: Restrict Rivalry
Once word gets out that a business is up for sale, it’s likely to attract many suitors. The prospective purchasers want to acquire the target firm, but they want to do so at the lowest feasible price and learn what is a bear hug in business.
A bear hug takeover is characterized by an excessively high purchase price offered by one firm to another. To put it another way, this clears the playing field for the bear hug acquirer and prevents potential rivals from entering the bidding.
#2: Don’t Get Into an Argument With The Targeted Business.
If the target firm’s management is hesitant to accept an offer to purchase it, the acquiring corporation may undertake a hostile takeover. The other option is to go straight to the shareholders for backing, or to battle to change the company’s management or board of directors.
To avoid a “bear hug,” an acquirer makes a substantial offer that the target company’s management is likely to accept even if they weren’t considering an acquisition. The company management has a fiduciary duty to maximize shareholder value.
The intended outcome of a bear hug approach is to turn a hostile acquisition into a friendly, mutually beneficial merger. If it works, the plan will prevent the problems and lawsuits that often accompany aggressive takeovers.
Denial of a Bear Hug
The bear hug is sometimes turned down by the target company’s management. Management may reject the offer if they determine that it is not in the company’s best interest to accept. But there are two major issues that may develop unless the offer is absolutely reasonable to be turned down.
#1: The Acquirer Makes a Personal Tender Offer to The Stockholders.
If the company’s management rejects the offer, the acquirer may make a direct approach to the shareholders with a tender offer to buy shares at a premium to the current market price. Everyone who owns stock in the firm is being offered a buyout by the acquirer at a price that will net them a healthy profit.
#2: Taking the Administration To Court
Management may be sued by shareholders when they cannot provide a reasonable explanation for rejecting such a substantial offer. A company’s board of directors must act in the shareholders’ best interests because of its fiduciary duty.