Bear Hug: Meaning
A bear hug or a teddy bear hug is a type of takeover where the acquiring company offers a higher purchasing price than the current price of the target company. Under this acquisition, a higher price is being provided because the target company is unwilling to sell. This acquisition doesn’t allow the target company to escape from the deal quickly.
Is Bear Hug a Hostile Takeover?
A bear hug is a hostile takeover because the acquiring company has already put forward a bid for a higher per-share price than the existing per-share price of the company. As a result, to save itself from the takeover, the target company has to create the same or higher value of its business than the bidding value.
Thus bear hug being the hostile takeover, creates pressure on the target company to come up with a plan or valuation figure which justifies it is in a better position as an independent entity. The target company legally abides to make decisions in the best interest of shareholders; as a result, in such a situation, it is either ‘take it or come up with a better alternative’ position for the target company. Shareholders often counter the Board of Directors of the company for denying such offers.
Understanding the Term: Bear Hug
A bear hug is a hostile acquisition because it is a friendly approach from the other party; it becomes suffocating for the target company. It is understood as if a bear has hugged you so firmly, and there are no other options left for you to run away. The target company is in the same situation, where the acquiring company has hugged (covered) it from all sides, and there is not much room available for running away. And therefore, such acquisition is called a bear hug.
Why Bear Hug Acquisition takes Place?
Under bear hug acquisition, the acquiring company is willing to take over the target company by hook or by a crook. The acquiring company sees a synergy benefit post-acquisition. The acquisition will either give a competitive advantage or will complement the existing goods and services of the acquiring company.
It not only benefits the acquiring company but also usually benefits shareholders of the company on a financial basis. The target company is at a loss only if it is not willing to sell.
Target for Bear Hug?
Target Companies for Bear Hug are generally start-ups or trouble-hit companies. Often, the companies that don’t show any future growth projections or do not display any financial difficulties/issues also become a target for acquisition.
Bear Hug Letter
It is the first formal letter provided by the acquiring company to the Board of Directors (BOD) of the target company showing interest in the acquisition. This letter can be privately sent to BOD or, at times, is publicly disclosed. It majorly includes introducing the acquiring company, the introduction of the Investment Bank involved in the deal, and details of the appointed lawyer. The letter may or may not involve the bidding price. The message also asks the target company to initiate due diligence by verifying all its internal documents. This letter is generally friendly, but it also threatens to go to the shareholders directly.
The Securities Regulators allow the bidders to disclose the acquisition after getting confirmation from their end. As a result, unless the bidder is sure about its bidding process. The offer letter is generally not open to the public. If the acquirer sees BOD not showing any interest, the acquirer discloses this letter to the public. It creates pressure on BOD.
But at times, the target company does not want to keep it confidential. In such a situation, the target company might release a press release to grab the attention of both the shareholders and other prospective bidders.
- It often allows shareholders of Target Company to be in a better position than earlier in financial terms.
- It gives a premium price or additional incentives to the target company.
- If the BOD of the target company does not accept the deal, the acquiring company has the full right to offer the deal directly to the shareholders of the Target Company.
- This acquisition mitigates competition in the market.
- It helps the acquiring company for further expansion of its product portfolio.
- The acquisition tries to convert a hostile takeover into a friendly takeover.
- It discourages other acquirers from bidding, as the acquiring company has already put forward a premium price. Thus it avoids a bidding war.
- Compared to other acquisition types, it requires fewer formalities and compliance requirements.
- Sometimes it becomes significantly costlier for the acquiring company.
- Sometimes it also takes more than expected time to recover the Return on Investment (ROI) by the bidding company.
- Denying the offer can take the top management of the company to the courts. Shareholders of the target company can also approach courts.
- In most cases, the acquiring company pays a higher price than the actual worth as of today of the target company.
- The acquiring company, at times, completely removes the top management of the target company. And this exercise takes place intending to have full control. However, it may adversely affect the growth of the target company to an extent due to the sudden changes in the policies and direction.
- Post-acquisition, the target company remains under continuous pressure to perform better. And thus, deliver higher results considering the high level of investment.
Real-Life Example of Bear Hug
- In 2008, Microsoft had put a publicly disclosed Bear Hug acquisition bid for Yahoo at a 63% premium price. The total deal was at $44 billion. At that time, Yahoo was struggling very hard to cope-up with its business, and so this deal was accepted. Thus, this was a successful Bear Hug Acquisition.
Irrespective of the flaws of Bear Hug Acquisition, it is one of the most sought-after hostile takeover techniques. This acquisition also often benefits all three parties: Shareholders, Target Company, and Acquiring Company. However, due to unplanned and incorrect planning, the acquirer company fails, and the Management of the Target Company can save the company from such an acquisition. Therefore, proper planning and execution of the strategy are critical to achieving the objective.
Quiz on Bear Hug
Let’s take a quick test on the topic you have read here.