Hostile Takeover Series — Bear Hug

A bear hug — in literal words is putting one’s arms around another person tightly so that there is no way of escape for the other person.

In this blog, we will discuss another method of hostile takeovers — The Bear Hug. In a Bear Hug, the acquiring company offers a substantial price over the market price to the target company board. It is difficult for the board to refuse the offer as it is a very generous one, and they will have to justify to all the shareholders why they had to reject the offer.

To understand this better, let us take an example. Consider company A is trying to acquire company B.

The current share price of Company B is USD 50. So currently the company B is valued at USD 25,000.

Now, for Company A to make a Bear Hug offer, it has to give a generous offer. So it offers USD 75 per share, a valuation of USD 37,500.

That is a premium of 50% (75–50/50), which is a great offer even if a company is doing well.

Company B has two options: either accept the offer or reject it.

If it chooses to reject it, all the shareholders can file a lawsuit against the board. The board has a fiduciary duty to make decisions beneficial to shareholders. The board has to justify why it decided to reject the offer. If the board rejects the offer, Company A can also offer the deal to Company B’s shareholders.

If it accepts the offer, the takeover is completed.

Even though Bear Hug is a form of a hostile takeover, if it is completed successfully, the target company’s shareholders are in a better financial position.

Real-Life Example:

Yahoo vs Microsoft

In 2008, Microsoft had made a bear hug offer to Yahoo, offering a 63% premium. At that time, Yahoo was struggling in its business, so this offer was accepted. Microsoft acquired Yahoo for USD 44 Billion.

A Bear Hug offer is usually an offer too good to say no to.