While many M&A deals involve friendly parties on both sides, a hostile takeover strategy may be pursued in certain situations. A bear hug strategy is a hostile takeover strategy that involves making an offer to buy a publicly traded company for a substantial premium to its current trading price. The high premium to the market price is designed to make it challenging for the target company to reject the offer. It also reduces the likelihood of competing bidders from suddenly emerging.

In such a situation, the offer to purchase the company is usually unsolicited. In other words, the publicly traded target company is not actively seeking a buyer. The potential acquiror can be either a private or public company. The potential acquiror may make an all-cash offer to purchase the target company’s shares or may use a combination of cash and committed financing.

A bear hug letter sets forth a company’s offer to acquire a public target company for a significant premium to the current trading price. A copy of the bear hug letter is usually made publicly available in a filing with the Securities and Exchange Commission (SEC). Prior to the public bear hug letter, the potential acquiror may have approached the target company’s management privately to discuss its appetite for an acquisition.

The bear hug letter is designed to put pressure on the target company and its board of directors to thoroughly consider the offer. The target company’s board has a fiduciary duty to act in the best interests of the shareholders and to maximize shareholder value. Since the purchase offer presents a financially attractive proposition for the target company’s shareholders, a failure of the target company’s board to properly consider the offer could result in a shareholder lawsuit. Another potential consequence of rejecting a lucrative takeover offer is a loss of shareholder confidence in the target company’s management.

The target company’s management team and board may conclude that the deal is not in the best interests of shareholders. If the target company decides to reject the bear hug, the potential acquiror may pursue a hostile tender offer. This will involve an offer to directly acquire shares of the target company from existing shareholders at a specified price per share.

The acquiror will commence the tender offer by filing a Schedule TO with the SEC presenting the terms and conditions of the tender offer. The key disclosure document is the Offer to Purchase, which is attached as an exhibit to the Schedule TO. The Schedule TO filing will also specify the deadline for shareholders to tender their shares. In accordance with SEC rules, every tender offer must remain open for at least 20 business days.

An example of a successful bear hug acquisition was Elon Musk’s acquisition of Twitter, which was renamed X Corp. After quietly purchasing almost 10% of Twitter’s shares on the open market, Elon Musk made an unsolicited offer to acquire the company at a significant premium. While Twitter initially rejected the offer and adopted a poison pill defense strategy, Twitter eventually accepted the offer.

An example of a failed bear hug was Xerox’s proposal to acquire HP Inc. in 2019. In Xerox’s bear hug letter, the CEO outlined the potential synergies of combining Xerox and HP. HP firmly rejected the offer and stated that Xerox’s offer undervalued HP. Despite efforts by Xerox’s management team and activist investor Carl Icahn, Xerox ended up abandoning the hostile takeover attempt as well as its tender offer for shares of HP.