Mergers and acquisitions are massive enterprise within the public capital markets. Public firms typically purchase different firms to develop their enterprise and strengthen their financial place. However not each firm needs to undergo a merger or acquisition. For the buying firm, it may be a wrestle to get a goal to conform. That’s the place a bear hug is helpful.
In capital markets, a bear hug refers to a passive-aggressive acquisition technique one firm can use to accumulate one other. Whereas it comes at a big premium, executed appropriately, a bear hug can circumvent extra hostile types of takeover.
Right here’s a more in-depth take a look at bear hugs as an M&A way. Furthermore, how firms use them as a type of coercion to make goal firms extra amenable to acquisition, even when they’re not seeking to get acquired.
Breaking Down the Bear Hug
The idea of a bear hug is easy. It entails providing to purchase an organization’s shares at a big acquisition premium, well-above the present market value. For instance, if an organization’s inventory value is $16, a bear hug may contain shopping for excellent shares for $24: a 50% premium. It’s a proposal that’s fairly actually too good to cross up.
Usually, it’s fully unsolicited. There are two causes behind a seemingly out-of-the-blue bear hug:
- First, the buying firm doesn’t wish to give its goal any time to realize leverage. If an organization feels prospected for acquisition, it would undertake maneuvers to quickly inflate its share value, thus driving up the price of acquisition.
- Second, the provide itself means that the goal firm wouldn’t be amenable to acquisition. Providing to purchase shares at an simple premium means forgoing acquisition negotiations—one thing an acquirer willingly does in the event that they don’t anticipate them to be fruitful.
As talked about, it is a very passive-aggressive acquisition technique. Actually, it forgoes any negotiations and easily forces the goal firm to select. Settle for the provide and settle for acquisition, or deny an especially profitable provide?
A Responsibility to Return Worth to Shareholders
What occurs when you refuse a proposal that’s too good to cross up? For those who’re a public firm, it might lead to a lawsuit from shareholders. That’s the devious nature of the bear hug! The board of administrators at a public firm is legally obligated to behave in the perfect curiosity of shareholders. Turning away a proposal to purchase shares at a big premium might be construed because the reverse of that obligation, and should upset shareholders.
Bear hugs put the board of administrators in a really precarious scenario. Until they’ll show that the provide to purchase share at a premium is not directly detrimental to the long run success of the corporate, they threat shedding shareholder confidence. But, in the event that they settle for the provide, it successfully means signing an acquisition settlement. Typically, the corporate delivering the bear hug will get what it needs.
A Passive-Aggressive Takeover
On the planet of mergers and acquisitions, there are hostile and amicable takeovers. Bear hugs exist someplace in-between. The pervasive tactic of a bear hug places it firmly within the territory of a hostile motion; but, it leads to vital profit for the goal firm and its shareholders. Furthermore, the unsolicited nature of bear hugs could make them really feel both hostile or amicable. For instance, a struggling firm might even see it as a lifeline, whereas an up-and-coming firm may see it as an underhanded ploy.
Bear hugs don’t occur all too typically within the public markets—largely as a result of they are usually an costly endeavor. Furthermore, many firms don’t need the popularity that comes with passive-aggressive takeovers. Most buying firms try to create synergy earlier than, throughout and after an acquisition: a prospect that’s tough when there’s a bear hug concerned.
Candidates for a Bear Hug
Bear hugs normally contain giant firms buying smaller ones. The expense related to such a acquisition technique means the acquirer must have vital monetary leverage over the goal firm. For instance, a big cap firm valued at $80 billion may use a bear hug to accumulate a small startup with proprietary know-how that’s solely valued at $250 million.
Talking of startups, small up-and-coming firms are generally prospected by giant and mega cap firms. These startups can typically fend off M&A exercise by small- and mid-cap firms, however succumb to bigger firms that search to accumulate them for his or her know-how or human capital.
How you can Combat a Bear Hug
Bear hugs can seem to be a no-win scenario for the goal firm, however there are methods to thwart them. For one, if the provide per share isn’t vital sufficient, the corporate can reject it with out worry of upsetting shareholders. Or, if the board of administrators can persuade shareholders of malintent by the buying firm, they’ll keep away from a lawsuit. Lastly, if the corporate can inflate its share worth forward of the upcoming provide, it might change into too costly for the buying firm to focus on with a bear hug.
Acquisition is a Recreation of Technique
Within the public markets, firms will do all the pieces they’ll to strengthen their place. For instance, this consists of making aggressive performs for firms they want to purchase. In the event that they don’t assume a goal will reply receptively, there are strategies they’ll use to coerce an acquisition. The bear hug is one such tactic. And whereas it’s costly and generally seen as underhanded, it’s nonetheless efficient, in a Marlon Brando Godfather kind of manner. You simply have to “make them a proposal they’ll’t refuse.”