Bear Hug Definition: What Is a Bear Hug in Business?

The business definition of bear hug is a hostile takeover bid hiding behind a veneer of extreme generosity.

In an attempt to acquire a business, investors or rival companies make an offer to buy it at a premium. This crowds out competition among other potential bidders, eager to acquire the business at more reasonable prices, and runs the risk of upsetting the company’s board. Shareholders, on the other hand, are amenable to bear hugs due to the increase in share value they bring.

To complete a bear hug, investors and rival businesses make an offer to acquire a company at far above market value. They might do so when the company’s board is attempting to sell their business, but often, this isn’t the case. The acquiring company or investor might make the offer whether or not the target business’s board intends to sell their business.

Since this offer is so generous, the board is between a rock and a hard place. To do what’s in the best interests of the company, they must accept the terms of the deal or persuade the shareholders why the deal isn’t a good one. The latter option is difficult to achieve in practice since these deals offer far more than is customary in any other situation.

Of course, board members have all sorts of reasons to resist such a takeover. What appears generous to average shareholders might look hostile to the board itself. This is why the strategy can cause pandemonium among all entities involved.

Investors can get a lot of mileage out of using the bear hug strategy when attempting to acquire companies. Here are a few core advantages to consider:

• Appeal for shareholders: When investors make bear hug offers, they do so knowing it will be more appealing to shareholders than board members or management. This is because buying a company at above market value has more of a direct monetary benefit for shareholders. The potential acquirer might even sidestep the board to reach out to the target company’s shareholders directly.
• Elimination of other bidders: Big bear hug offers can clear the board of competitors. Since the point of the strategy is to offer sizable amounts of money, it allows investors to transcend normal market dynamics. Other bidders are more likely to try to acquire companies close to market rate. When one company steps in with a substantially higher offer, others have an incentive to walk away rather than go higher.
• High-value payouts: The bear hugger investor can incentivize board members and company management to take the deal by ensuring they’ll receive high-value payouts. Many bear hug deals lead to the dismissal of current company leadership, and this is part of the reason leadership tends to try to resist them. This is why many bear hug offers come with additional promises to leave leadership in a better financial position than they were prior.

Bear hug acquisitions have their share of downsides, too. Consider these cons to putting this strategy into practice:

• Competition from white knight investors: While bear hug investors or companies might crowd out competition in many cases, this isn’t always the case. Target companies might reach out to friendly competitors—or white knights—who will offer them even better money to merge. This is just one way the strategy can backfire.
• Frustration among board members: Bear hug offers can leave the target company’s management and board of directors with a bad taste in their mouths. While they might be generous on paper, their intention is to oust people from positions of leadership. This can lead to battles between both the target company and the acquiring company, as well as between the target company and its own shareholders.
• Potential legal woes: Boards must act in the interest of their companies—and when they don’t, they often land in legal jeopardy. If an investor or rival company offers far more than market price for a business, the board of that company must either convince their shareholders the deal is a bad one or take it. If the board walks away from the deal, it opens them up to lawsuits and other forms of revolt from their shareholders who likely stood to gain from the bear hug acquisition.

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