Bear Hug – Definition, How it works, Reasons for a Takeover

Bear Hug – Definition, How it works, Reasons for a Takeover are treated in this article. You will find it helpful and informative.

Bear Hug example

Bear Hug - Definition, How it works, Reasons for a Takeover
Bear Hug – Photo Source:

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Bear Hug is a phrase used to describe a situation whereby a company decides to purchase the shares of another company for a greater or incremental price as compared to the market value.

Many businessmen have described Bear Hug simply as a hostile takeover and seek to understand the reason for a takeover and how it works.

Thus, a bear hug is a hostile takeover approach where a possible acquirer presents his intention to acquire the stock of another company at an estimated value which could be a much higher price than the market value or its normalized worth.

The acquirer brands can offer beyond the market value that exceeds the price that bidders had offered to pay such that the company concerned cannot refuse.

Bear hug may be viewed only in market value but can only be seen as a measure to reduce the issue of unnecessary competition among other bidders.

Also, if the company concerned is affected by a huge financial problem, the offer could be very tempting and it is hard for the management of the company in view to reject the esteeming offer.

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The offer in these situations is usually much uninvited for example when a company is passively looking for a buyer. Thus a public company is expected to appoint members of the board of directors and the acquirer’s management creates a proposal to the board of directors using a panel of notable individuals’ chosen to represent shareholders provided the acquirer has no intention of taking over the company through coercion.

How Bear Hug Works

The phrase “bear hug” literally means the act of placing one’s arms around another person in such a way that the other person feels extremely tightened and perhaps cannot be worsened easily by the hug. In the area of mergers and acquisitions, the bear hug method is intended to deduce the concerned company and become nearly unable to escape from the takeover attempt.

Moreover, a bear hug is a form of a hostile takeover, in mergers and acquisitions (M&A). This forum is the acquisition of a concerned company by another company often known as the acquirer by directly addressing the concerned company’s shareholders through financial measures such as tendering an offer or through a proxy vote.

The operation differs between a hostile and an approachable effort meant to make the concerned company’s shareholders an improved and more efficient financial standard before the takeover.

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In other words, a hostile takeover is the purchase of an offer in a very approachable and outgoing manner that suits the business but coercion is involved it is no longer under the dynamics of a hostile takeover.

Reasons for a Bear Hug Takeover

The following are the major reasons that explain how companies desire to use a bear hug takeover method rather than other forms of takeovers:

1. There will be Limited rivalry

When it is announced publicly that a company is looking forward to being acquired, there are probably going to be numerous acquirers who are interested in the offer.

The latent buyers will desire to secure the acquisition of the concerned company depending on the highest bidders or the best possible price.

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A particular company will agree to pursue a bear hug takeover, by offering a price that is beyond or above the normalized market price. This eventually dissuades other bidders from trying to pursue the takeover, their acquirer limits unnecessary rivalry through the bear hug.

2. Avoid unnecessary confrontation with the concerned company

Most companies try a hostile takeover due to the management of the concerned company being disinclined to receive an offer to acquire their company.

The replacement is to contact the shareholders openly to get their endorsement or strive to substitute the management or board of directors of the company.

Thus, in the case of a bear hug, the acquirer takes a more approachable approach by proffering and offering a substantial offer that the management of the target company is most likely to be amenable to this firm. The target company’s management is bound by a fiduciary responsibility Fiduciary duty.

This body has the sole responsibility that fiduciaries are tasked with when handling issues with other parties, precisely when such issues are monetary related issues.

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The goal of the bear hug strategy is to change the primarily hostile takeover into a friendly merger where financial issues can be systematically agreed upon in favor of the shareholders.

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