Bear Hug: Business Definition, With Pros and Cons

What Is a Bear Hug?

A bear hug is an offer to buy a publicly listed company at a significant premium to the market price of its shares. It is an acquisition strategy designed to appeal to the target company's shareholders. Bear hugs are used to pressure a reluctant company's board to accept the bid or risk upsetting its shareholders. Unsolicited in nature, a bear hug bidder makes it difficult for the target's board to refuse by offering a price well above the pursued company's market value.

Understanding Bear Hugs

Bear hugs are unsolicited takeover bids. But to qualify as one, the offer must include a meaningful premium to the market value of the target company's stock. Because company boards have a fiduciary duty to act in the best interests of the company and its shareholders, refusing a rich premium risks lawsuits, proxy contests, and other forms of shareholder activism.

Bear hugs can be a costly strategy for the acquirer. As such, they occur when the target company's board has either rejected or would be expected to reject such an advance, necessitating a direct appeal to shareholders.

At a minimum, bear hugs force the targeted company's leadership to explain why the bid (to say nothing of the market) undervalues their stock, and what the company intends to do about the low valuation.

A bear hug puts incumbent management on the defensive and focuses attention on the company's share price. One company chief executive on the receiving end of the tactic described it as "a gradual, rolling dispiriting of the opposition. The whole idea of a bear hug is that it becomes an inevitable, self-fulfilling prophecy."

Advantages and Disadvantages of a Bear Hug

Advantages

A bear hug allows the acquirer to present its bid directly to shareholders, bypassing the targeted company's board. The downside for the pursuer is that the tactic is unlikely to result in friendly talks with the incumbent management and board, who may seek a white knight deal with a different buyer viewed as more acceptable.

Shareholders of a company who receive a bear hug benefit from the prospect of a higher share price on offer. Even if it doesn't lead to a quick deal, a bear hug puts pressure on a company's board and management to get the share price above that offered by the bear hugger.

Disadvantages

A bear hug implies incumbent management and board members are not interested in a friendly deal. And, absent a formal tender offer, a bear hug has no sure way to overcome that resistance.

This acquisition tactic has the potential to distract managers and directors of the targeted company to the ultimate detriment of its business and all stakeholders, including the bear hugger if they are successful. Whether directly or by implication, a bear hug draws critical attention to the company's current management and share price.

If the bear hug is ultimately successful, incumbent managers are likely to face an ouster from the new owners. They might have to content themselves with golden parachutes triggered by change-of-control provisions in their executive pay agreements.

Examples of Bear Hugs

Bear hugs can happen when a company's stock falls on hard times or simply because the acquirer places a high value on the targeted business.

Elon Musk's unofficial offer to buy Twitter (now X) in April 2022 at an 18% premium to its market value but a 22% discount to Twitter's share price a year earlier was described as a bear hug. Musk eventually succeeded, taking over the company in Oct. 2022 for $44 billion. The company changed its name to X Corp. in April 2023 and the platform changed its name to X in July 2023.

Earlier examples include:

• Xerox's (XRX) pursuit of HP (HPQ) in 2019
• An attempt by Exelon (EXC) to acquire NRG Energy (NRG) in 2009
• Microsoft's (MSFT) bear hug of Yahoo in 2008

None of those efforts ultimately succeeded.

The Bottom Line

Hostile takeovers are part and parcel of the corporate world. The bear hug is just one type of takeover attempt that acquirers use. But rather than work their way into the company's board or management by force, they usually sweeten the pot by making shareholders an offer that's well above market value. By doing this, shareholders can then take their reins and force the target's board to either accept or go into talks with the acquirer.