Bear Hug

Key Highlights

• A Bear Hug is an acquisition strategy where an acquirer company offers to purchase another company (the target) at a substantially higher price than its then current market price.

• Key characteristics includes premium offer, friendly/ hostile and board-level proposal.

What is a Bear Hug?

A Bear Hug is an acquisition strategy where an acquirer company offers to purchase another company (the target) at a substantially higher price than its then current market price. The offer is typically addressed to the board of directors of the target company, not the shareholders.

The term "bear hug" originated from the thought of an offer so friendly that the target firm is obligated to accept - just as a bear hug that can't be shaked off.

Key Characteristics

• Premium Offer: The bid is tendered at a premium price far higher than the company's current stock market price.

• Friendly or Hostile: Although it's friendly, it becomes hostile when the target refuses.

• Board-Level Proposal: The acquirer tends to approach the board instead of issuing a public bid.

How it Works?

Initial Interest

• The acquiring company spots a target and makes a decision to acquire it.

Proposal to the Board

• The acquirer issues a formal letter to the target's board proposing to purchase the firm at a premium.

Board's Dilemma

• The board has to think carefully about the offer. If they turn it down for no good reason, shareholders may think they're losing out on value and will put pressure on the board or sue.

Possible Outcomes

• The board takes the offer.
• The board turns it down, and the acquirer puts the offer straight to shareholders (hostile takeover).
• Negotiations can ensue to settle more favorable terms.

Example

Suppose that a company's stock is priced at ₹100 per share. Another company comes along and pays ₹150 per share to take it over - a 50% premium. That is a classic bear hug: the bid is extremely difficult for the board and shareholders to resist.

Why Employ a Bear Hug?

1. Put Pressure on the Target Board: It's difficult for the board to say no to a generous bid without angering shareholders.

2. Avoid Hostility in the First Place: It begins as a non-hostile offer, with strong likelihood of acceptance.

3. Build Shareholder Support: High prices get the attention and support of the shareholders.

Risks Involved

1. Board Rejection: Even when offering high, the board can reject if they feel the company is worth more.

2. Public Backlash: In case it goes hostile, it can damage the acquirer's reputation.

3. Overpaying: The acquirer might overvalue the target and pay an excess.

Bear Hug vs Hostile Takeover

Feature	Bear Hug	Hostile Takeover
Approach	Private offer to the board	Public offer to shareholders
Tone	Initially friendly	Aggressive from the start
Offer Price	Typically high	May or may not be high
Board Reaction	Pressured to accept	Often bypassed