Introduction
Bear hug refers to an offer by one company to purchase the shares of another company at a price which is much higher than the price for which the company’s stock is worth. The bear hug strategy is an acquisition strategy used sometimes, especially when the other company’s owners or management is ready to sell their business.
Understanding Bear Hug
The offer of the offering company is persuasive in nature as the company makes an overly generous offer without any solicitation from the target company. Bear hug offer generally leads to an acquisition agreement as the offer price is lucrative and in excess of the current value of the company.
The target company and its management usually feel compelled to accept the offer since it is in the best interests of the existing shareholders. A bear hug acquisition strategy is similar to a hostile takeover, but the value is high and hence is more beneficial to shareholders. In case the target company does not accept the offer, the action of the company is questionable in the interests of the shareholders.
A company may try to put itself into a bear hug to avoid more confrontational types of takeovers which may be uneasy and require too many formalities and compliances. From the perspective of the acquiring company, a bear hug can help in strategically integrating the target’s business with its own business or may help eliminate competition.
Many times bear hug offers are made to companies struggling financially, debt-ridden, or startups with a lookout for the acquisition of assets and synergy benefits. However, in other instances, companies which do not show any financial hardship, need, or difficulties could become targets for a potential bear hug.
Conclusion
Though a bear hug is a hostile takeover attempt, it seeks to put the owners of the target in a better financial position. The acquiring company may offer other incentives to take over the target in addition to the high offer price. A bear hug can be an expensive buy for the acquiring company, and it may take a while before the acquirer sees a return on investment.
