Bear Hug

What Is a Bear Hug?

In business, a bear hug is an offer to buy a publicly listed company at a critical premium to the market price of its shares, intended to appeal to the target company's shareholders. It's a [acquisition strategy](/resource acquisition-strategy) used to pressure a hesitant company board to acknowledge the bid or risk disturbing its shareholders.

"Bear hug" addresses such offers' strength as well as their excluded nature. By offering a price well over the sought after company's market value, the bear hug bidder makes it hard for the acquisition target's board to deny.

Understanding Bear Hugs

To qualify as a bear hug, the acquisition bid must offer a significant premium to the market value of the target company's stock.

Since company boards have a fiduciary duty to act to the greatest advantage of the company and its shareholders, declining a rich premium risks lawsuits, proxy contests and different forms of shareholder activism.

Since bear hugs can be an exorbitant strategy for the acquirer, they happen by definition when the target company's board has either dismissed or would be expected to reject such an advance, requiring a direct appeal to shareholders.

At least, bear hugs force the targeted company's leadership to make sense of why the bid — to not express anything of the market — undervalues their stock, and what the company plans to do about the low valuation.

A bear hug puts incumbent management on the defensive and spotlights consideration on the company's share price. One company chief executive on the less than desirable finish of the tactic has depicted it as "a continuous, rolling dampening of the resistance. The whole thought of a bear hug is that it turns into an unavoidable, inevitable outcome."

A bear hug offer, however normally monetarily good, isn't requested by the target company.

Bear hugs can happen when a company's stock has fallen on difficult situations, or basically in light of the fact that the acquirer puts a high value on the targeted business. Elon Musk's unofficial offer to buy Twitter (TWTR) in April 2022 at a 18% premium to its market value yet a 22% discount to Twitter's share price a year sooner was portrayed as a bear hug.

Prior models incorporate Xerox's (XRX) quest for HP (HPQ) in 2019, an endeavor by Exelon (EXC) to get NRG Energy (NRG) in 2009, and Microsoft's (MSFT) bear hug of Yahoo in 2008. None of those efforts ultimately succeeded.

Benefits and Disadvantages of a Bear Hug

A bear hug allows the acquirer to introduce its bid directly to shareholders, bypassing the targeted company's board. The downside for the follower is that the tactic is probably not going to bring about friendly discussions with the incumbent management and board, who might look for a white knight deal with an alternate buyer saw as more acceptable.

Shareholders of a company getting a bear hug benefit from the prospect of a higher share price on offer. Even on the off chance that it doesn't lead to a quick deal, a bear hug puts pressure on a company's board and management to get the share price over that offered by the bear hugger.

Sadly, a bear hug suggests incumbent management and board individuals are not intrigued by a friendly deal. Furthermore, missing a formal tender offer, a bear hug has no certain method for conquering that resistance.

A bear hug can possibly distract managers and directors of the targeted company to the ultimate impairment of its business and all partners, including the bear hugger in the event that they are fruitful. Whether directly or by suggestion, a bear hug causes critical to notice the company's current management and share price.

Assuming that the bear hug is ultimately effective, incumbent managers are probably going to face ouster by new owners. They could need to satisfy themselves with golden parachutes set off by change-of-control provisions in their executive pay agreements.

Highlights

• Without a tender offer for the shares outstanding, a bear hug isn't a guarantee the bidder will purchase the company at the stated price.
• A bear hug relies on the company's shareholders to pressure the board into accepting the proposed terms or entering exchanges with the maker of the offer.
• In the event that a target company will not acknowledge a bear hug it risks being sued or tested in board races.
• A bear hug is a casual offer to gain a company at a premium to the market price of its stock, disclosed without the consent of its board.