A bear hug occurs in business when a company makes an offer to acquire another company for a price that is considerably higher than the current market value of the target company.
Find out more about how a bear hug in business is defined, and the ramifications for the companies involved, particularly the target company’s shareholders.
Definition and Example of a Bear Hug in Business
When a company makes an offer to purchase another company that values the target company at a price much higher than its value in the market, it is called a bear hug.
Note
A bear-hug offer can stunt bidding competition, given that it tends to be loftier than the offers other companies are making for the same acquisition.
A bear hug can put the target company in an untenable position. Bear hugs don’t always work out, as this example shows:
In 2008, Microsoft made an acquisition offer for Yahoo!. Microsoft’s offer came in at 62% higher than the closing price of Yahoo! stock at the time. That deal never happened; However, it can help us understand the strategy and psychology around bear hugs in business.
How a Bear Hug in Business Works
A closer look at Microsoft’s offer for Yahoo! exposes the strategy behind a bear-hug acquisition offer. As a University of Maryland law professor’s paper on activist debtholder takeover bids explains:
“In this (bear hug) 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.’ This approach can also be used as a scare tactic with management….”
In other words, the would-be acquirer making the high bid uses an announcement about its intent to leverage. This takes us back to Microsoft’s 2008 press release announcing its bid for Yahoo!.
That release seemed designed to make things difficult for Yahoo! management by pointing out the massive premium its offer carried and noting that Microsoft was “committed to working closely with Yahoo! management and its Board of Directors as they, along with Yahoo! shareholders, evaluate this compelling proposal.”
The key word in that sentence is “compelling.” The offer itself is designed to be one that management and the board can’t refuse.
Note
Similar to a hostile takeover, a bear hug in business attempts to paint the target company into a corner, particularly because its shareholders, given the outsized premium, stand to benefit if the two companies agree to a deal.
In fact, if a company rejects such a deal, lawsuits from angry shareholders often follow. This was the case when Yahoo turned down Microsoft.
Pros and Cons of a Bear Hug in Business
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Can be a good deal for shareholders
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Limits bidding competition for the acquiring company
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Avoids a fight with the target company
Pros explained
- Can be a good deal for shareholders: As noted, shareholders tend to profit if a bear hug gets accepted, given that the offer comes at a substantial premium.
- Limits bidding competition for the acquiring company: As common sense dictates, an offer that values a company at a price considerably higher than the prevailing market rate can serve to keep other companies from making bids, as they might not be able to or want to make a competitive bid.
- Avoids a fight with the target company: Management has an obligation to generate returns for shareholders. When a bear-hug offer comes along, it might be difficult for the target company to turn it down for this reason.
Cons explained
- Can result in lawsuits if the target company rejects the bid: As noted, Yahoo! faced shareholder lawsuits when it turned down Microsoft. These lawsuits came, in part, because shareholders watched management pass on a deal that would have generated considerable profit for Yahoo! investors.
- Can be expensive to execute for the acquirer: To limit or eliminate competition and attempt to strike a relatively quick deal, the company making the bear-hug acquisition offer can end up spending more than it would have if it had undertaken a more standard bidding process.
Key Takeaways
- A bear hug in business occurs when one company makes an acquisition offer for another that values the target company at a price significantly higher than its market value.
- This is a strategic move designed, in part, to back the target company’s management team and board of directors into a corner, as they will often face significant pressure from their shareholders to accept the deal.
- Rejection of the bear-hug offer can result in lawsuits from investors, as seen in Microsoft’s failed bid for Yahoo in 2008.