Bear Hug in Finance: Definition, How and Why it Happens

A bear hug is the action of putting one's arms around something so tight, making it near impossible to escape. So how does it convey in the business world, especially in mergers and acquisitions?

In this article, we look further into Bear Hugs, what they entail, and how they happen.

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How does a corporate bear hug work?

When a bear hug offer is in motion, the buyer makes a generous offer directly to the board of directors, using a bear hug letter. The offer is usually so good that the board of directors will have no choice but to accept, or consider the offer. Hence the term bear hug. 

The idea is to force the board of directors to agree to the transaction, because of their fiduciary duty to consider offers that are in the best interests of the shareholders. 

Refusing an offer at a much higher price could lead to shareholder lawsuits and loss of shareholder confidence. The public announcement usually comes after the board has agreed to the sale.

Why would a company use bear hug as an acquisition strategy?

A bear hug takeover strategy, like any other form of hostile takeover, happens for two reasons

1. The buyer believes that the target company is undervalued and could agree to a deal with a higher valuation.

2. The buyer believes that there’s a higher chance of the company’s shareholders accepting the offer than its board of directors.

Using a bear hug acquisition strategy, acquirers can set the bar high by offering a premium on the target company’s shares, which could prevent other potential buyers from making competing offers. This is a great way to limit competition from other bidders and clear the path for the serious acquirer. 

Although it’s a form of hostile takeover, the buyer reduces the likelihood of resistance from the management of the target company because the deal will appear less hostile and is open for discussion.

Advantages and disadvantages of bear hug hostile takeovers

A bear hug strategy is a bold move in corporate acquisitions. It’s best to carefully weigh the risks and benefits of this move.

The advantages

• Shareholders stand to receive a premium on their stock in the company
• It raises awareness in the market that the stock is (or at least, may be) undervalued
• There are far fewer formalities required than in a regular acquisition process
• The direct offer tends to discourage bids from other companies (and bidding wars)
• The attractive offer involved compels the shareholders and the board to accept the deal and speed up the acquisition process

The disadvantages

• In an effort to woo shareholders, the premium offered may be too high to create value for the buyer
• As with many forms of hostile takeover attempt, proceedings can quickly become acrimonious
• The board may not be willing to cooperate with the buyer, even after the deal closes
• The return on investment of companies acquired through bear hugs tend to be lower

What happens when bear hugs are rejected?

When a bear hug offer is rejected, the buyer usually resorts to a tender offer. A tender offer is much more hostile, where the takeover bid goes public, and directly to the shareholders. The goal is to buy enough shares of the targeted business, and inform the public of the offer and force the board of directors to sell the company well above market price.

If the board still refuses, they can face massive lawsuits by neglecting their fiduciary duty to the target company’s shareholders. Also, if shareholders feel the board is not looking out for their best interests, it could lead to a loss of confidence. This will negatively affect the company's stock price.

Examples of bear hug takeover

1. Microsoft and Yahoo (2008)

Microsoft’s failed acquisition for Yahoo! in 2008 is a prime example of a bear hug. In a bear hug letter, Microsoft CEO outlined his vision to the Yahoo! board, writing:

“together we can unleash new levels of innovation, delivering enhanced user experiences, breakthroughs in search, and new advertising platform capabilities.”

24 hours later, in case the Yahoo! Board were in any doubt what was intended, Ballmer made the move public. And from there, one of the most well-known examples of a hostile takeover attempt began.

2. Sanofi and Genzyme (2010)

In 2010 in the biotech industry, Sanofi attempted to acquire Genzyme for $69 per share, which valued the deal at approximately $18.5B. Genzyme’s management team rejected the initial offer, claiming that it undervalued the company, given their potential in rare disease treatments and efforts to resolve their manufacturing issues.

This led Sanofi to take the offer directly to the shareholders. Sanofi persisted, increasing their offer to $74 per share, while signaling that they are open for a slight increase just to win over the shareholders and some board members. This move put Genzyme under pressure.

Like typical hostile takeovers, the tension in their negotiations were inevitable. They urged their shareholders to refrain from taking any action on Sanofi’s offer until they get a better offer. Eventually after month-long negotiations, Genzyme sealed the deal along with additional financial contingencies based on the future performance of a key Genzyme drug.

Read more examples of hostile takeovers.

3. Elon Musk acquires Twitter (2022)

The latest and most trending example of a bear hug acquisition strategy is Elon Musk’s acquisition of Twitter in 2022. But before the bear hug takeover, Elon already disclosed a 9.2% stake in the company, making him the largest shareholder. He also refused to join the board, which hinted at a possible takeover.

In April 2022, he offered to buy all of Twitter’s shares for a tempting price of $54.20 each, valuing the deal for about $44 billion. Elon positioned the offer as a way to open the gates of free speech on Twitter and promote its much-needed functional democracy. 

Out of hesitation, Twitter’s board tried to prevent Elon’s and any other potential acquirer’s unsolicited takeover using a “poison pill strategy.” The deal provoked much legal and public drama, especially when Elon openly discussed the acquisition’s details, including concerns and updates, using social media. 

But eventually, both parties settled after complex negotiations and even after Elon’s attempt to withdraw from the deal due to user-privacy issues and fake accounts. The acquisition was finalized, but not without ongoing drama between the two parties.