Let’s first understand, “what is a bear hug in business?” The technique through which a company or a potential buyer offers to buy another company's stock at a value or price more than the actual worth of that company is called a bear hug. The company purchasing is ready to offer more prices than other bidders in the market are paying that company. Since the price offered is higher, the competition is removed, and the management of the target company accepts the offer in most cases.
This is done when the company that has been given an offer is not actually looking to sell, but since the acquiring company has seen some value in acquiring the target, an offer is made to the management of the target company. This occurs even though the company was never interested in being purchased by another company.
A company may try to wrap itself in a bear hug to avoid more aggressive takeovers, which can be unsettling and involve excessive formalities and compliances. A bear hug can assist the acquiring company in strategically integrating the target's business with its own or in removing competitors.
Bear hug business offers are frequently given to organisations struggling financially, in debt, or startups looking for asset acquisition and synergy benefits. In other cases, organisations that do not demonstrate any financial distress, need, or difficulty may become targets for a possible bear hug. So, bear hug finances a new life to a struggling firm.
Did you know? A hostile takeover is similar to a bear hug purchase technique, except the value is higher, making a bear hug better for stockholders.
How Does Bear Hug Takeover Happen?
In a bear hug, the company which is giving the offer to purchase a large number of shares needs to quote a price that is higher than the market price. The company will use this method in case the acquisition is going to be difficult or time-consuming.
This generally takes place in two cases. One of these is to minimise the competition for buying the target company. The other is buying the company that offers products or services similar to your product or can be sold together with your products or services. It is similar to a hostile takeover, although it generally benefits the shareholders more financially.
The companies take bear hugs seriously as they have to act in the best possible manner considering the interests of the shareholders. Sometimes they sell ready-made start-ups or struggling business concepts with the hope that the companies and their assets will have a greater value soon and drive more profits than they are now.
An example of bear hug would be the case of Microsoft intending to take over business of Yahoo, where Microsoft has offered Yahoo for buying a share of 63% acquisition premium. It is the difference of purchase consideration with a target company’s pre-merger value.
Why Are Companies Looking for a Bear Hug?
There are a number of reasons why companies look for a bear hug. Some of those have been explained in detail below-
If a company wants to be acquired, then there will be a large number of players that will be ready to buy it. They will be ready to pay the best possible price so that they can make the company their own. When a corporation decides to pursue a bear hug takeover, it proposes a price that is far higher than the fair market value. This removes all the competition for the acquirer as other players would not even pursue the company due to the high price offered.
Avoid Conflict With the Target Company
Companies undertake a hostile takeover because the target company's board of directors are not ready to agree to the offer for the acquisition of their company. The option is to contact the shareholders directly for permission or to battle to replace the company's management or board of directors.
The company that wants to acquire makes such kind of offer that the board of directors of the target company are not able to reject the offer even though they were never thinking of it in the first place. The primary aim of the management is to maximise the shareholder's wealth. Thus this strategy tries to convert the hostile acquisition into a mutual friendly acquisition. If successful, the method has the potential to avoid the barriers and legal issues that are prevalent in hostile takeover acquisitions.
Benefits of Bear Hug
The benefits of the bear hug are given below. These are as follows:
- In many a case, numerous incentives are offered to the target company so that the bear hug acquisition can be completed.
- The bear hug strategy helps the shareholders gain as they will get a higher price for holding the company shares.
- When the target company is willing to be purchased, it helps to minimise competition in the market.
- It enables the organisation to acquire complementary products and services while also expanding its market reach.
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Limitations of Bear Hug
Some of the limitations of a bear hug have been mentioned below-
- Since the acquirer firm has paid a higher price for the acquisition, it is under pressure to show a good return on investment.
- In case the target company is not able to live up to the expectations or fails to do as per the acquirer's expectations, then it can be very costly.
- The original management of the target company may no longer have control as the acquiring company will look after all the things.
Refusal of a Bear Hug
For various reasons, the target company's management may reject the bear hug. The management may reject the offer if they really believe it is not in the best interests of the company's shareholders. However, unless declining the offer is absolutely justified, two issues may arise.
A Lawsuit May Be Filed Against the Management
When management cannot justify their decision to reject such an attractive deal, shareholders can sue. Again, the board of directors has a fiduciary responsibility to serve the best interests of stockholders.
The Acquirer Makes a Direct Proposal to the Shareholders
If the offer is rejected by management, the acquirer may approach the shareholders directly with a proposal to purchase company shares at a premium to the market price. In this case, the company will approach all the shareholders and will try to buy the shares from them by giving them a good profit.
Bear Hug Letter
The letter sent by the company that wants to acquire to the management of the company which is to be acquired is called the bear hug letter. This letter contains all the terms and conditions relating to the offer. It also mentions the price at which the company is ready to buy the shares of the target company, which is much higher than the market price of the share. This letter can be directly sent to the board of directors, or also a public statement can be made for the same. Once the letter comes, the board goes through the offer, considers all terms and conditions, and finalises a decision that will be most suited for the company's shareholders.
The shareholders of the acquired firm or the target company benefit greatly from a bear hug takeover since the target company's shares are acquired at a considerably higher rate than the market rate. We hope this article helped you understand what a bear hug is in business and everything around it.
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