Bear Hug

It refers to a hostile takeover strategy wherein the potential acquirer offers to buy a publicly listed company at a significantly higher price than what the company is actually worth.

Author: Rohan Arora
Rohan Arora
Rohan Arora
Investment Banking | Private Equity

Mr. Arora is an experienced private equity investment professional, with experience working across multiple markets. Rohan has a focus in particular on consumer and business services transactions and operational growth. Rohan has also worked at Evercore, where he also spent time in private equity advisory.

Rohan holds a BA (Hons., Scholar) in Economics and Management from Oxford University.

Reviewed By: Kevin Henderson
Kevin Henderson
Kevin Henderson
Private Equity | Corporate Finance

Kevin is currently the Head of Execution and a Vice President at Ion Pacific, a merchant bank and asset manager based Hong Kong that invests in the technology sector globally. Prior to joining Ion Pacific, Kevin was a Vice President at Accordion Partners, a consulting firm that works with management teams at portfolio companies of leading private equity firms.

Previously, he was an Associate in the Power, Energy, and Infrastructure Investment Banking group at Lazard in New York where he completed numerous M&A transactions and advised corporate clients on a range of financial and strategic issues. Kevin began his career in corporate finance roles at Enbridge Inc. in Canada. During his time at Enbridge Kevin worked across the finance function gaining experience in treasury, corporate planning, and investor relations.

Kevin holds an MBA from Harvard Business School, a Bachelor of Commerce Degree from Queen's University and is a CFA Charterholder.

Last Updated:December 19, 2023

What is a Bear Hug?

A bear hug refers to a hostile takeover strategy wherein the potential acquirer offers to buy a publicly listed company at a significantly higher price than what the company is actually worth.

This is in the form of a premium on the market price of the company's shares. 

It is an acquisition strategy that is often used to put pressure on a company's board of directors.

The deal is often so favorable and generous that shareholders are more likely to accept it, making it harder for a company's board of directors to reject them. 

A rejection of the deal can put the board in a tough position as they risk facing legal action as well as a loss of shareholder confidence. Such a deal is also made to eliminate competition from the acquisition of the target company as it is made to exceed the competitors' bids. 

These offers are typically unsolicited and offered regardless of whether the company has expressed an interest in being acquired, which is why such offers are frequently classified as hostile attempts.

Key Takeaways

  • Hostile takeover strategy offering a high premium, pressuring the target to accept.
  • Leverages fiduciary duty, making rejection difficult for the target company's board.
  • Elon Musk's Twitter bid and Facebook's acquisitions illustrate bear hug strategies with compelling premiums.
  • Pros include better shareholder positions and avoiding prolonged battles; cons involve high costs and potential loss of autonomy.
  • May lead to lawsuits, direct shareholder approaches, or proxy fights, causing harm to both companies.

Understanding A Bear Hug

A bear hug is characterized as a 'rough tight embrace' in the common vocabulary. It's when you hold someone so tightly that they can't get away from you.

Thus, in a similar way, deals like this are meant to make the target company nearly incapable of escaping the takeover attempt, which is why they are given this term.

Such a deal normally begins with the acquiring company offering to buy a large number of shares of the target company at a premium price, i.e. at a price that is significantly higher than the current market price.

These offers are mostly made to put massive pressure on management. Often, companies may announce the terms of the takeover to the public too, in an attempt to increase the pressure on the board as a large number of shareholders may want them to accept the deal. 

Thus, the acquirer often makes it exceedingly difficult for the management to reject such a proposal.  

These kinds of offers are commonly higher than what the firm would ordinarily get if it was actively looking for a buyer.

Considering the board of directors’ primary objective is to act in the best interest of the shareholders, it often forces the management to accept such proposals. 

If the acquisition isn’t accepted, the board often risks a lot of negative sentiments from shareholders who may hold a grudge for not getting the maximum returns, which can often result in lawsuits. 

These proposals are mostly hostile and are often made to force an acquisition. It is especially useful when the target company has previously rejected an acquisition offer or is likely to reject an acquisition. 

This is because this proposal necessitates them to discuss it in-depth and to act in the best interest of the shareholders and thus forcibly accept and go forwards with the deal. 

It can also be used to eliminate competitors from the race for acquisition as these deals tend to be much more lucrative for the shareholders than the competitors. 

Professor Michelle M Harner, of the University of Maryland in her paper “Activist Distressed Debtholders: The New Barbarians at the Gate?” explains the process of such offers. 

She explains, “In this approach, the offeror approaches management about an acquisition while simultaneously announcing its offer for the target‘s shares. The publicity of a bear hug is meant to stir shareholders to apply pressure to the company's board.” 

She further explains how these deals are often used as a threat wherein the acquirers may threaten to make the terms of the hostile takeover public in the event the deal is not accepted and thus is often used as a scare tactic.  

The buying offer is genuinely amicable, even though this proposal is hostile in form. This is because it tries to leave shareholders in a stronger financial position than before the transaction. While the offer is uninvited, it may be advantageous to the stockholders.

Example of bear hugs

Hostile takeover attempts in the form of bear hugs can be seen in a variety of cases, be it Elon Musk’s offer to buy out Twitter, Facebook’s multiple acquisitions, or Microsoft’s offer to Yahoo.

1. The Twitter buyout proposal

Elon Musk offered to buy 100% of Twitter at $54.20 per share, which was a 38% premium on the market price as of the day the proposal was announced and a whopping 54% premium on the price on the day when he first started to invest in the company. 

The takeover attempt could be categorized as such an offer due to the high premium offered, making the deal exceedingly hard to reject.

2. Facebook’s acquisition of WhatsApp and Instagram

Facebook’s acquisition of WhatsApp is one of the largest deals in history, with Facebook acquiring the company for $19.6 billion. For a company with only $20 million in revenue, this proposal was too generous to refuse and ultimately had to be accepted

Even the tech giant's acquisition of Instagram can be seen as an example of such a deal to remove its competition. The deal of $1 billion was massive for Instagram, which only had 13 employees at that time. The deal was reportedly struck as Facebook saw Instagram as a potential competitor and thus with this move could acquire its potential competition. 

3. Microsoft’s offer to buy out Yahoo

These offers, however, may not always guarantee an acquisition. An example of this can be seen in the Microsoft Yahoo deal. Microsoft proposed to buy out Yahoo shares at a 62% premium back in 2008. 

The terms of the deal were also made public to put further pressure on Yahoo. However, the $45 billion proposal was still rejected by the cofounder and CEO, Jerry Yang.

Due to not accepting the acquisition, Yahoo faced a lot of backlash from shareholders and even saw several lawsuits for not going ahead with the deal.

Types of Bear Hugs

There are namely 2 types of such deals

  • Teddy bear hugs
  • Grizzly bear hugs

Teddy hugs are when letters stating the terms of the offer are sent in private. The ultimate goal is to get a company to negotiate. The latter, however, is much more hostile and is when the letter with the terms of the offer is made public to put massive pressure on the company management. 

The Microsoft Yahoo offer was an example of a grizzly hug as Microsoft openly announced its plan to acquire Yahoo. 

Reasons to go for a bear hug

These offers are often quite costly as it involves paying a high premium on the part of the acquirer. However, there are a variety of major reasons why companies use this method.

First, such an offer is much more forceful and, more often than not, guarantees an acquisition or takeover. 

If a company is looking to desperately takeover a particular business knowing that the business may not want to voluntarily sell, such deals can be a good idea to force the acquisition. Two other major reasons are as follows:

1. Restrict competition

Such a proposal is often used to eliminate competitors from the race to acquire a particular target company. However, as this method results in an offer well above the market price, it often results in other bidders dropping out as they can’t compete with the price.

This clears the field for the acquiring company.

2. Mitigate confrontation with the target company

Such offers are often made when the target company has already rejected or is expected to reject such offers. 

Instead of going for a drawn-out corporate battle between the two firms, such a proposal aims to make the process an amicable merger by providing a good deal for the shareholders and putting them in a better financial position than they were before and hence it provides a deal which is likely to be accepted rather than rejected.

Pros and Cons of bear hugs

The the pros are:

  • Such a deal is normally good for the shareholders as it puts them in a better financial position than they were before the deal
  • Avoids long drawn-out fights, as a company more often than not finds it beneficial to accept the offer
  • It eliminates the competition by providing a deal that is far better than what the company is worth.

The cons are:

  • Considering this is a hostile attempt to takeover, the target company may seek out a white knight deal with a separate buyer on its own terms. Thus, the acquirer may lose out on the deal.
  • It is a very costly method of takeover as the company has to pay a large premium to acquire the business and puts pressure on the acquirer to prove its investments.
  • The present management of the target company can often lose its autonomy and independence as was the case for Instagram after the Facebook deal.
  • In the event of rejection of the deal, it often leads to a long process of lawsuits and proxy battles which is costly and time-consuming for both parties involved.

Can a bear hug be rejected?

The question thus arises, does the target company always have to comply with the offer, and is there any way out of this sort of hostile takeover?

If the board is to reject the deal, it has to justify to the shareholders that even such a generous proposal is undervaluing the value of the company and that the company's value will increase in the years to come.

For example, in the Microsoft-Yahoo deal, while Microsoft had made an offer of nearly $44.6 billion, Yahoo felt even this was undervaluing their worth. However, if turning down the deal is not justified, the management of the company may have to deal with a lot of ramifications

1. Lawsuits

If the shareholders feel that the management has not fulfilled their fiduciary duty to serve the best interests of the shareholders, they may file lawsuits against the management. This was what happened in the Microsoft-yahoo deal wherein a lot of shareholders were unhappy by Yahoo rejecting the offer and proceeded to sue Yahoo.

2. Acquirer directly approaches the shareholders

The acquirer can completely bypass the board and directly approach shareholders to buy their shares at a price above the market price and gain a majority.

3. Proxy Fight 

A rejection may result in a proxy battle where a group of shareholders may join forces to win a corporate vote. The acquirers may convince the majority of the shareholders to vote to overthrow the current management in case the offer was declined.

This may result in a long-drawn corporate battle which can be harmful to both the firms which often need to spend a large amount of time and money in the proxy fight.

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Researched and authored by Soumil De | LinkedIn

Edited by Colt DiGiovanni | LinkedIn

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