A Bear Hug is often seen as a low aggression M&A tactic used in an unsolicited takeover approach when trying to acquire a target. The acquirer approaches the target with an offer that has an acquisition premium way in excess of the current market value. This figure is often above any reasonable fair value had the target chose to sell itself. The attitude of the target management will then decide if the bid escalates into a full-blown hostile takeover approach or if the merger or acquisition is settled on friendly terms. Therefore, the objective of the bear hug approach is to convert what was initially a reluctant or hostile attitude into a friendly and mutually acceptable acquisition.
The tactic involves approaching the target management making the intentions of the acquirer known. If the response of the target has been difficult to judge and maybe a casual pass has not been effective a bear hug is often used. As the management and board of directors of the target company are legally obligated to act in the best interests of its shareholders as per their fiduciary duty, they will essentially be bound to accept such an offer so much in excess of fair value.
If successful, the strategy can eliminate most obstacles and avoid any legal disputes that may arise in a hostile takeover. Refusal to do so may expose the directors and management to lawsuits from disgruntled shareholders who feel they have been deprived of maximizing their opportunities for profit. Should this be the case and the offer is not entertained the acquirer often proceeds with a tender offer made directly to the shareholders.
Bear Hug Advantages
- The acquirer is able to “force” the target Board of Directors to make a recommendation on the buyout offer so as to not violate its fiduciary duties. The target company’s management is under a fiduciary responsibility to generate the highest return for their shareholders.
- A potential buyer will aim to consummate the acquisition of the target firm at the most favorable price. However, if the fact that the company is looking to be acquired is public knowledge, there is likely to be multiple interested buyers. By offering a price that is well above the fair market price, the acquirer discourages other bidders from attempting to pursue the takeover and thus avoids a bidding war
- By avoiding confrontation with the target company, the acquirer offer a high price and avoid the expense of a hostile takeover such as fighting management or board of directors of the company.
- Although a bear hug may be interpreted as a hostile takeover maneuver, it often leaves shareholders in a far more positive financial situation than they would otherwise have been.
BearHug Disadvantages
- Despite the probability that a bear hug strategy will be successful, it can still be extremely expensive. If this is the case, the acquirer may not be able to earn an adequate return on its investment. Therefore, this approach needs to be considered against the cost of a friendly approach with a lower cost.
- In addition, the acquiring company may be forced to offer additional incentives to the target company. Favorable compensation packages or even CVR’s may increase the cost of the acquisition above profitable levels.
- Refusal by the target board of directors to accept the bear hug offer can potentially lead to lawsuits being filed on behalf of the target shareholders. The board has a fiduciary responsibility to the shareholders and refusing an offer in excess of fair value could be considered a neglect of duty.
