Bear Hug Meaning
A bear hug is a prevalent acquisition strategy in the market where the target company gets acquired by another company where all the shares are bought by the acquirer at much higher premium than what the shares are worth in the market. This kind of strategy is generally favorable to the acquired company but in the same way, they are generally unsolicited.
How Does it Work?
- For a bear hug to be a successful one, the acquiring company must make an offer where a vast number of shares of the target company are acquired by the acquiring company at a rate that is much higher than the market rate. A company may go for this strategy to mitigate a more difficult form of acquisition or acquisitionAcquisitionAn acquisition is defined as the act of taking over or gaining control of all or most of another entity's stocks by purchasing at least fifty percent of the target company's stock and other corporate assets. , which will significantly take a longer time.
- The company, which is acquiring the target company at times, also uses bear hugs to restrict the competition or may go for such acquisition to get hold of goods and services that complements its current product offerings. It is similar to a hostile takeover, but this generally proves more financially beneficial to the shareholders.
- Even if there is no management decision to get acquired, it is bound to take bear hug offers seriously because a company is bound to act in the best interest of its shareholders. Sometimes they offer made for start-ups or struggling business models with the belief that the companies and their assets will have a higher value in the near future and drive more profits than what it is currently driving.
Examples of Bear Hug
Let’s discuss the following examples.
One example of bear hug acquisition was the case of Microsoft intending to take over the business of Yahoo, where Microsoft offered Yahoo to buy its shares at a 63% acquisition premiumAcquisition PremiumAcquisition premium is the excess amount paid by the acquirer over the actual value of the target firm to close the deal during a corporate takeover. It is the difference between the purchase consideration and the target company's pre-merger value. than what it closed the earlier day. This looked really beneficial for the shareholders as at that point in time, Yahoo was really struggling, and their business was making huge losses.
The acquisition of Whatsapp messenger services by US Tech giant Facebook. Facebook decided to bring the business of Whatsapp under its umbrella and made a lucrative offer to Whatsapp, which was hard to be refused. Thus within months of management talks, Whatsapp finally decided to get acquired by Facebook and continue its business under the ownership of Facebook.
Failure of Bear Hug
- Bear hugs may prove to be costly if going ahead; the product offering doesn’t work well in the market.
- At times of desperate acquisition, the target company may get acquired at a much higher rate than what it is actually worth.
- The target company will always have pressure to exceed its performance to give away its profit as a return on the investment made by the acquiring company.
- At times the entire management or workforce gets replaced by the acquiring company because, after the acquisition, the target company has a full hold over the target company.
- When there is a lawsuit against the management where the board of directors is directly responsible for serving the best interest of the shareholders.
Why are Companies Using Bear Hugs Takeover?
Companies use this takeoverTakeoverA takeover is a transaction where the bidder company acquires the target company with or without the management's mutual agreement. Typically, a larger company expresses an interest to acquire a smaller company. Takeovers are frequent events in the current competitive business world disguised as friendly mergers. strategy due to the following reasons:
#1 – Restrict Competition
When a company announces its willingness to get acquired, there will be multiple buyers interested in it. Thus they come beneficial in beating the competition where the target company is bound to get acquired because of the price it gets offered, which is much higher than the market rate.
#2 – To Mitigate or Avoid Confrontation with Target Company
Companies may go for this strategy when the target company is skeptical or reluctant to accept the offer for getting acquired. Thus, the alternative approach to getting the shareholder’s nod is to go for a bear hug where the acquiring company offers a price that is too hard to be refused.
Some of the advantages are as follows:
- It works for the best interest of the shareholders, where they get a better price for holding the shares of the company.
- The acquiring company may make additional incentives to the target company to increase the chances of making the takeover successful.
- It helps to limit competition in the market when there is a willingness by the target company to get acquired.
- It helps the company get hold of complementary products and services and extend the market expansion of the company.
Some of the disadvantages are as follows:
- They can prove costly if the target company fails to perform in later stages after getting acquired at a higher price.
- There is always pressure on the acquired company to prove its return on investment.
- The present management may totally lose its hold over the management decision making as the acquiring company gets hold over the processes.
Bear hug takeover is very beneficial to the shareholders of the acquired company or the target company because they get a better valuation of their share prices where the target company’s shares are acquired by the acquiring company at a much higher rate than what is prevailing in the market.
This article has been a guide to Bear Hug and its meaning. Here we discuss examples of bear hugs with their reasons, failure, and working. You may refer to the following articles to learn more about finance.