What is a bear hug?

A Bear Hug refers to an acquisition strategy where one company makes an offer to purchase the shares of another company at a price that is much higher than the share market price of the stocks for the target company. A bear hug is a form of hostile takeover where the acquirer makes a rather generous offer to the target company which far exceeds what the competition and other bidders, thus eliminating competition and making the offer more lucrative.

When the bear hug offer is made to the target company, the board of directors of the company may feel compelled to take up the offer as it has the best interest of the shareholders in mind. However, denying the bear hug offer could raise doubt upon the shareholders as to why they aren’t prioritizing the shareholder’s interests.

This is especially the case when a bear hug offer is made to companies struggling with their finances or companies that are debt-ridden. Bear hug offers are often made to such companies as well as to start-ups in some cases where the acquiring company may be seeking to acquire new assets and gain synergy benefits for its operations.

The reasons for a bear hug takeover include:

1. Limiting competition

   By presenting a very generous offer to the target company which is higher than other bidders, the acquiring company essentially eliminates their competition and makes the bidding process faster and easier for them. A bear hug takeover especially poses this benefit when there is public information about a company wanting to sell. In this condition, there will be many interested buyers and a bear hug strategy is an efficient way of discouraging competitive buyers.

2. Avoiding confrontation with the target company

   As stated previously, a bear hug strategy helps to avoid confrontation and a bidding war with competitors and other prospective buyers for the target company. But, the bear hug strategy is also a useful mechanism for avoiding confrontation with the target company.

   The bear hug strategy offers a softer approach as compared to other methods of hostile takeover where companies may end up looking heads and rejecting multiple offers. Since the bear hug compels the board of directors to sell the company’s shares in the best interest of the shareholders, the bear hug approach can be quicker and less confrontational.

How does a bear hug work?

When described physically, a bear hug is the act of one person putting their hands around another person and hugging them extremely tightly, to the point where the person on the receiving end of the hug is unable to escape it. This is where the bear hug takeover strategy derives its name.

Let’s say company A makes a bear hug style offer to company B. The company is trading at ₹85 per share and they have publicly announced that they are open to selling. Now, Company A is interested, but so are companies C, D and E. Therefore, company A offers ₹100 per share to Company B for 2,00,000 shares.

This instantly roots out the other interested companies and removes the competition from buying Company B and it provides Company B with a very lucrative offer that is much higher than its market value while being in the absolute best interest of its shareholders. Although this is more expensive for Company A, it saves them time and effort in terms of competition and negotiations.

Benefits of Bear Hug

Hostile takeover strategies are believed to have little benefit to the target company while having a major benefit to the acquirer. However, this isn’t always the case. In the bear hug takeover method, shareholders may come out of the trade-in a positive financial situation.

A few benefits of a bear hug to the target company are that they will receive value much higher than their actual share price for the acquisition. If they are looking to sell, this strategy may give them an additional incentive and accepting the offer leaves the shareholders more financially sound and happier with the board of directors’ decisions.

A few benefits of a bear hug to the acquiring company are that a bear hug allows them to root out and get rid of the competition. It also helps avoid a major confrontation with the target company and puts increased pressure on them to accept the offer considering the best interest of their shareholders.