In business, a bear hug occurs when a company makes an offer to acquire another company at a price significantly higher than the target company’s actual market value. Learn more about what is a bear hug in business and the implications for the companies involved, especially the shareholders of the target companies.
What is Bear Hug in Business and Example
Bearhugs can put the target company in an untenable position. Bear hugs don’t always work, as the following bear hug example shows.
In 2008, Microsoft acquired Yahoo! Microsoft’s bid was 62% above Yahoo!’s closing price. 1 The deal never materialized. However, it helps to understand the strategies and psychology surrounding bear hugs in business.
Important: Solid bids tend to be higher than other bids for the same acquisition, which can stifle bidding competition.
How a Bear Hug in Business Works
Details of Microsoft’s services for Yahoo! Reveal the strategy behind a ferocious takeover bid. A University of Maryland law professor’s study of activist takeover bids explains:
In the hug bear approach, bidders approach management about the acquisition while simultaneously announcing an offer for stock in the target company. “Bearhug publicity is designed to force shareholders to put pressure on the company’s board of directors.” This approach can also be used to scare management.
In other words, potential buyers presenting winning bids use statements of intent to use leverage. Now back to his 2008 press release from Microsoft. Microsoft has announced a bid for Yahoo! Announced. This release appears to be designed to fix a problem with Yahoo! Management, noting the premium of the product they offer, prompted Microsoft to announce. management and its board of directors, Yahoo! stockholders, please appreciate this compelling proposal.
The key word in this statement is “require”. The offer itself must be one that management and the board cannot reject. When a company refuses such a deal, it often results in lawsuits from disgruntled shareholders. This was the case when Yahoo rejected Microsoft.
Pros & Cons of a Bear Hug in Business
Pros.
- It may be a good deal for shareholders: As mentioned above, once a bearhug is accepte, the shareholder usually benefits, as the offer carries a significant premium.
- Limit bidding competition for acquiring companies: Common sense tells us that a bid that values a company at a price well above the prevailing market price is discouraging other companies from bidding because they may not or may not be able to bid competitively. may be useful.
- Avoids combat with the target company: Management has an obligation to return profits to shareholders. For this reason, it may be difficult for the target company to refuse an offer of a bear hug.
Cons.
- If the target company rejects the offer, it may lead to litigation: As previously mentioned, Yahoo! faced shareholder lawsuits when Microsoft refused to do so. These lawsuits allege that management has filed a lawsuit against his Yahoo! investors.
- Acquirers can be expensive to run: In an attempt to limit or eliminate competition and secure a relatively quick deal, companies placing takeover bids may end up spending more than they would have done in a more standard bidding process.
Conclusion
A bear hug in business occurs when a company makes an acquisition bid for another company that values the target company at a price well above its market value. It’s a strategic move designe to corner the target company’s management and boards, which often face significant pressure from shareholders to accept the acquisition. As evidenced by Microsoft’s unsuccessful bid for Yahoo in 2008, a rejected bid for Bear Hug could lead to litigation from investors.
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