Bear Hug Meaning in Business

A bear hug is a business offer to buy a publicly-traded company for a much higher price than what the target is actually worth. It's a tactic used to persuade a hesitant board of directors to accept the proposal or risk separating the company's shareholders.

The power of such offerings and their unwelcome nature is reflected in the bear hug. The bear hug bidder makes it tough for the acquisition target's board to refuse by paying the price considerably beyond the company's Market worth.

Bear Hug Exercise

To be considered a bear hug, the takeover bid must offer a significant amount above the target company's stock market valuation. As bear hugs are a costly approach for the acquirer, they only happen when the target company's board of directors has either rejected or is likely to reject the offer.

Bear hugs require the targeted firm's leadership to explain why the bid undervalues their shares and what the company intends to do about it. It puts the company's current management on the defensive and draws attention to the stock price.

Bear Hug vs Hostile Takeover

A bear hug acquisition approach is comparable to a hostile takeover, but the value is higher; therefore, it benefits stockholders more. If the target company declines the offer, the actions of the company will be doubtful when it comes to the best interests of the shareholders.

Bear Hug Takeover Examples

Bear hugs can occur when a company's stock falls on hard times or because the acquirer places a higher value on the targeted enterprise. Elon Musk's acquisition of Twitter (TWTR) in April 2022 at 18% higher than its market value, i.e., 44 billion USD, was specified as a bear embrace.

Xerox's (XRX) pursuit of HP (HPQ) in 2019, Exelon's (EXC) effort to acquire NRG Energy (NRG) in 2009, and Microsoft's (MSFT) acquisition of Yahoo in 2008 are previous examples.

Pros of Bear Hug Succession

Here are the benefits of a bear hug succession:

• A bear hug permits the acquirer to make its offer to shareholders directly, bypassing the board of directors of the target firm
• The potential of a higher share price on offer is beneficial for the shareholders of a company who experience a bear hug
• A bear hug pressurises a company's board to get the share price above the one provided by the bear hugger, even if it doesn't result in a speedy agreement

Cons of Bear Hug Finance

Here are the limitations of bear hug finance:

• A bear hug signifies that the current administration and board members are not interested in a cooperative agreement. It will not be enough to overcome resistance without a formal tender offer
• If successful, a bear hug can distract management and directors of the targeted organisation, ultimately harming the company's business and stakeholders
• A bear hug brings serious attention to the firm's existing management and stock price, whether explicitly or implicitly
• If the bear hug succeeds, new owners will likely replace the current management team. They may have to deal with change-of-control clauses in their CEO compensation agreements

Bear Hug Hostile Takeover Reasons

Some of the reasons why firms prefer to use a bear hug takeover strategy are as follows:

• Limit the Number of Competitors

  There are likely to be numerous potential bidders when there is public disclosure that a company is looking to be acquired. Potential purchasers will strive to acquire the target company at the greatest feasible price.

When a business decides to pursue a bear hug acquisition, it proposes a far higher price than the Fair Market Value. This deters other bidders from attempting to acquire the company, effectively clearing the field for the bear hug acquirer.

• Avoid Getting into a Fight with the Corporation you're After

Companies try a hostile takeover because the target company's management is hesitant to accept an acquisition offer. The option is to go straight to the shareholders for approval or to battle to replace the company's management or board of directors.

In the case of a bear hug, the acquirer takes a softer approach by making a generous offer that the target company's management is likely to accept even if they weren't actively considering a sale to another company. The bear hug strategy aims to turn a hostile takeover into a friendly one.

Conclusion

A bear hug is a hostile takeover effort that aims to improve the financial status of the target's owners. In addition to the high offer price, the acquiring corporation may provide other incentives to take over the target. For the acquiring corporation, a bear hug can be an expensive purchase, and it may take some time before the acquirer sees a Return on Investment.