What is a bear hug in business? A bear hug is when you wrap your arms around someone and squeeze them tightly. It's a gesture of affection and appreciation, and it's also used as a way to show dominance or authority.
But how does this work when it comes to business and what does this mean for investors? In the business world, a bear hug can be used as a negotiation tactic or to show support for someone else's idea.
It's a powerful move that can make an impactful impression on others. It's kind of a way to kill a company's board of directors with kindness. In this article, we'll explain exactly what a bear hug is in business, how it works, and provide some examples.
What is a bear hug in business?
If an acquisition target receives an offer to have their shares bought at a premium when compared to the market price, you can be sure that the company is experiencing a bear hug.
You might be thinking, why would a company offer more than what the public markets believe the company is worth? Why not just buy the company outright?
The answer is that a hostile takeover is much harder to achieve if the management and board of directors are not on your side. This is because a hostile takeover requires a lot of votes from the shareholders to succeed.
If the management and board are not in favor of the takeover, they can use their power to influence the shareholders to vote against it.
By offering a premium, the acquirer is essentially trying to entice the target company with a "bear hug" so that they will be more open to negotiation. This also creates a responsibility for the board of directors to accept the offer as the shareholders now have a fiduciary duty to their investment.
The premium price offered shows that although the market might be bearish on this stock, the acquirer is bullish and is willing to bet on the company's future. In this way, a bear hug can be seen as a show of support from the acquirer, and it can be a very persuasive tactic in business negotiations.
What is a bear hug?
The term "bear hug" is derived from the physical gesture of wrapping your arms around someone and squeezing them tightly, which is typically done as a show of affection. As mentioned earlier, a bear hug is a term used in the business world to describe a situation where one company offers to buy another company's shares at a price that is higher than the current market price.
It's also a friendly way of showing support or appreciation. Rather than a hostile takeover, a bear hug is seen as a more gentle approach to negotiation. Imagine if you were selling furniture for $1000 at a garage sale and you aren't too happy with letting it go. But then an old friend drives by with a smile on his face and gets out of the car.
He walks up the driveway and gives you a big hug and offers $2000 for it. Now, you are much more likely to sell it to him even though he could have just lowballed you and offered $800. You realize that although you don't really want to sell it, you also have the responsibility to accept the deal so you can provide for your family who is watching from the sidewalk excited about the prospect of what they could do with the extra cash.
The bear hug in this example is the $2000 offer. By offering more than what the market price is, the friend is essentially giving you a bear hug and trying to persuade you to sell it to him. Now, let's say the purchaser is an antique furniture seller and thinks he can refurbish it to sell for $10,000 at an auction within the next year.
The extra $1000 would be well worth it as the original seller could have had second thoughts if a $1000 asking price was offered. This is similar to if a company sees the potential of another company and feels like it can improve the value of the asset beyond the premium that is being offered.
On the surface level, it might look like a very generous offer but if the acquirer sees the potential to increase the value, it might be a bargain. It could be a way to solidify the deal before another acquirer also realizes the potential and offers a higher price.
In the stock markets, pay attention to bear hugs. Most companies don't offer premiums for no reason. There could be potential waiting to be unlocked as soon as the right owners come along. Although they are not common, investors that can become aware of these acquisition strategies can gain further insights into a company that other market participants might not be aware of.
Why are they called bear hugs?
The name "bear hug" comes from the fact that this offer is usually made during a time when the stock market is down, or "bearish." Rather than being attacked by the bears, it surprises market participants by offering sympathy and comfort as their shares are being offered to be bought at a premium.
These business moves also come from the playful way that two grizzly bears will wrap their arms around each other during mating season. The move is seen as a way to show dominance or authority over the other bear.
So, the business nature of the term "bear hug" is pretty accurate. This act is seen as friendly and can be interpreted as a vote of confidence from the acquirer (bear). They are essentially saying, "I like you and I want to buy your company."
The acquirer might be bearish on the current fundamentals but with their offer, they are trying to show support for the company. This support can lead to the bear turning into a bull. Imagine if a company accepts the deal and the stock price pops 20%.
The acquirer just made a killing. This is especially true if they can continue to make the value grow. Whether that be through integrating the company or improving upon other aspects of the newly acquired business.
How a bear hug works
The simple way that a bear hug works in business is when one company buys another outright. The acquirer purchases all of the outstanding shares of the target company, and therefore take complete control over it.
Rather than an aggressive takeover, a bear hug is seen as a friendly gesture since the target company's shareholders are receiving full value for their shares, if not more. Management that has been stressing out over the bearish signals that analysts have been giving them can walk away with a hefty payout, and the employees can keep their jobs.
It works because on a psychological level, it's an offer that is difficult to refuse. For the sake of the company's future, a buy-out might be exactly what is needed, and a bear hug can provide that. All without a war in the board rooms or on Wall Street.
A bear hug is something that you can't get out of even if you wanted to. Luckily, it's seen as friendly because the price that is offered is usually more than the current market value.
What is a bear hug letter?
Bear hug letters are becoming more common as a way for companies to reach out and propose a deal before another company has the chance to. In this letter, the acquirer states their interest in acquiring the target company and provides a rough outline of what they are willing to pay.
The goal is to start a conversation and get the target company's attention before another acquirer does. This method is seen as more proactive and can increase the chances of a successful acquisition.
With a bear hug letter, there is no guarantee that the target company will accept the offer or even engage in talks. But it is a way to offer a premium price for the company without getting into a bidding war with other potential acquirers.
It's a nice gesture and can break through the crowd as others might be lowballing and kicking them while they're down as the company struggles.
Bear hug example
The most recent real-life example is Elon Musk's attempt to buy Twitter. He was interested in buying Twitter to preserve freedom of speech and as the richest person alive, he has the funds to do so. He put forth an offer of $54.20 a share, which is a significant premium of 38% over the market value at the time.
Now, some people say that this is overpriced for the company and by market standards, it was.
But his approach to this business acquisition was not necessarily about an immediate ROI but rather the preservation of freedom of speech. This can be argued as priceless. Not being censored himself can also be a major benefit as he can have better communication with his followers.
This in turn can improve the transparency and investor sentiment for his other publicly traded company Tesla.
Ultimately, it looks like the deal has been in flux due to a problem with bots. But it goes to show the influence a friendly bear hug can have on a company, even one as big as Twitter.
If it wasn't for the bot issue, the bear hug could have secured the deal by now. And we would all be on Twitter, sharing our thoughts without fear of censorship. But, this story continues as the negotiations go on. It can be a bear hug that lasts longer than anticipated.
While this example was more public, it's not the only one where a company has tried to buy another at a significant premium. In fact, it's becoming more common as companies try to acquire others in their industry before they get acquired themselves. This is the new reality of business and the bear hug is a friendly way to do it.
The stock market and business can be a serious and confusing place for some people. By having fun with terms such as "bear hug" we can learn about business in a more light-hearted way.
At the end of the day, a bear hug is just a business tactic to get another company to agree to be acquired. Business is often given a bad reputation but the bear hug is a tactic that can be seen as friendly. It's a way to avoid a hostile takeover and offer a premium price for the company.
While it might not always work, it's a nice gesture and can increase the chances of a successful acquisition. So the next time you hear about a company being "bear hugged", you'll know exactly what it means. And if you are in business, it might be helpful to use this strategy rather than a predatory offer. After all, business is about relationships and the bear hug is a way to start one off on the right foot.