Legal Outlook Q3 Public M&A: Takeover Talks – Somebody needs a hug

Jade Jack: Hello and welcome to our seventh podcast in our series on UK public M&A. My name is Jade Jack and I'm a Senior Advisor on public company matters here at Ashurst Perkins Coie. I'm delighted to be joined by colleagues Tom Mercer and Harry Thimont, both of whom are specialists on public M&A. Earlier today, we published our third quarter review of the UK public M&A market in which we considered some of the trends we're seeing. And today I wanted to discuss with both of you one of those key trends, the move towards arguably more aggressive and hostile tactics by bidders, most notably the use of bear hug announcements. So first, welcome to you both.

Tom Mercer: Thanks Jade. Great to be here.

Harry Thimont: Likewise, thanks Jade. And certainly been a busy summer, so there's plenty to talk about.

Jade Jack: It really has. I think a lot of people might have expected things to slow down over the summer months, but that doesn't seem to have happened at all this year. Tom, perhaps you could give us a quick overview of the market before we get started.

Tom Mercer: Yeah, certainly. Activity was very high again this year through the summer months with nine firm offers announced in July alone, which would've made for a very busy month at any time of year, let alone the middle of the summer. Momentum has tailed off slightly coming into the autumn, interestingly as it did in 2025, but the year is still promising to be strong for M&A, certainly by deal value. UK public companies continued to attract a lot of interest from overseas bidders, with around two thirds of all firm offers announced so far this year being from non-UK bidders. And the focus remains split between the small and large cap ends of the market. There were seven firm offers announced, which exceeded £1 billion in value in the last quarter. And in Prologis's £14 billion offer for SEGRO, we had the largest UK takeover that's been announced since Takeda's offer for Shire in 2018. We had roles on both transactions.

Jade Jack: Thanks, Tom. I think the number of deals above £1 billion is really quite striking, but also it's the tone of some of these situations which has particularly caught our attention. And I think what's really stood out for me is that bidders are appearing to just be increasingly comfortable turning to what we call perhaps more hostile or aggressive tactics, and in particular the use of the bear hug announcement, which has been used really quite successfully in a number of high profile situations. But if we just start with the basics for anyone who is less familiar with the term, perhaps Harry, could you explain exactly what a bear hug is?

Harry Thimont: Yes, of course. So a bear hug is a public announcement by a potential bidder setting out the terms of a possible offer for the target company. Now typically it's one that the target board has already rejected in private and so the bidder goes public to put pressure on the target board to engage.

Jade Jack: So when we say a hug, it's not an especially friendly one?

Harry Thimont: No, quite. The emphasis is more on the bear than the hug there. And in terms of the announcement, it will usually contain the terms of the bidder's possible offer, its rationale for combination or the acquisition, i.e. Why it thinks that the deal makes strategic and financial sense and sometimes the bidder might also include a description of how the target board has responded in private to its approaches so far, all of which is designed to reflect well on the bidder and poorly on the target board.

Tom Mercer: Yeah, and it's worth stressing that bear hug announcements are voluntary where a bidder makes a bear hug announcement, it's choosing to go public. That's very different from a strategic leak which isn't permitted under the code nor the UK market abuse regime. So if a bidder wants to put its proposal in the public domain, it has to do so properly through an announcement.

And in so far as that announcement includes details of financial terms or the conditions which the bidder's bid might be subject to, it needs to run the announcement past the panel in advance. In some cases, it wouldn't be entirely uncommon for the announcement to effectively look like a full form rule 2.7 announcement simply with the key wording at the top saying this is not a rule 2.7 announcement and that's why bear hugs are sometimes also known as virtual bids.

Jade Jack: Thanks both. And Harry, perhaps just pausing on the purpose of the bear hug, while they're not particularly friendly, they're not just the first step towards a hostile offer, are they?

Harry Thimont: No, not necessarily. It's often, or rather it can be interpreted in that way, but the principal purpose of a bear hug is normally to bring the target board to the negotiating table, ultimately with a view to agreeing terms on a recommended deal. And clearly most bidders would still much prefer to have a recommendation on the basis that this normally allows a bidder to have access to non-public information to conduct due diligence. And importantly, it would allow the bidder to implement the takeover via a scheme of arrangement.

(New paragraph): And certainly over the last decade or so, schemes have been used in more than 80% of all UK public offers for a number of reasons, the main one being that you get a binary outcome. Either the scheme delivers 100% of the shares or it will lapse, which provides any bidder with certainty of execution. That said, a bear hug is clearly regarded as a relatively aggressive tactic and it can sometimes be a precursor to a hostile offer, and we'll come onto some examples of that later.

Jade Jack: So why would a bidder go down this route? Tom, what's in it for them?

Tom Mercer: Well, there are two main advantages, and there are advantages which we think bidders are particularly interested in the current market where there can be a dislocation between the market valuation of a company, perceptions of value on the target board and perceptions of value on the bidder side. So those two advantages. First, it allows a bidder to bypass a reluctant board and engage directly with shareholders. That's particularly valuable where the bidder has made multiple approaches and been repeatedly rejected by the target board. A bear hug tactic might become something that a bidder wants to pursue, even if it isn't outright hostile, if it feels that the target board isn't reflecting the correct valuation assumptions. So a bear hug effectively allows the bidder to put its valuation proposition to shareholders directly.

The second point is a bear hug can allow the bidder to speak to a much broader community of shareholders and other financial and non-financial stakeholders than it can if the transaction is being pursued through private negotiations with the target. So the bidder can directly speak to multiple shareholders going beyond the panel's so-called rule of six. Peripherally, that can also help in terms of being able to speak to multiple financing providers, or other providers of things like hedging, which is increasingly relevant where you're talking about overseas bidders.

Jade Jack: And could we just unpick the rule of six a little? Because I think that's quite central to why this tactic is used.

Tom Mercer: Yeah, certainly. So the rule of six really dates back all the way to the foundation of the code and to general principle four and the need to avoid false markets in relation to securities affected by a possible bid. Interestingly, when the COVID pandemic struck, there was another rule of six introduced by the UK government there to prevent the spread of communicable disease. In this case, under the code to prevent the spread of false markets and rumour in relation to takeovers. But the rule is a simple one unless and until there's been the announcement of an offer or possible offer, discussions in relation to that possibility can only be undertaken with a limited number of people, no more than six organisations excluding regulators and professional advisors. And that can significantly restrict the extent to which the bidder can go and have discussions, and therefore get a sense as to whether its valuation proposition is something that will find favour with the target shareholder community.

So the advantage of a bear hug in this respect is it gets it all out there, and allows a much broader set of conversations and therefore better precision from the bidder's perspective around what the trading price is likely to be for a bid.

Jade Jack: Although of course bidders do still need to be careful about what they say even once those terms are made public.

Tom Mercer: Yes, absolutely they do. Under rule 19 of the code, statements made during the course of an offer must be prepared with the highest standards of care and accuracy. And generally speaking under the code, the maxim of you are held to what you say will apply. And that's particularly the case in relation to statements around price, terms, and structure of a transaction. So if a bidder describes its proposal in a certain way or says something about what it will or won't do, the panel will expect the bidder to stand behind that.
And added to that, of course, bear hug announcements or virtual bid announcements as I mentioned earlier, tend to be quite detailed, which means there's more scope to be caught out when compared, for example, to short, anodyne leak statements, in which really don't say very much at all. Therefore, they need to be drafted with real care with relevant code requirements carefully considered.

Jade Jack: So as long as bidders are careful, this all sounds quite attractive for them, but of course there are going to be downsides to making such an announcement as well. So Harry, perhaps could you talk through some of those?

Harry Thimont: Yeah, sure, absolutely. I think the first is loss of confidentiality. Clearly, as soon as a bidder goes public with a possible offer announcement, everyone knows that the target is in play and at what price, and that will increase the risk of interlopers, i.e., competing bidders who may see an opportunity that they had not realised was there previously. Secondly is timetable. The bear hug announcement will trigger the well-known 28-day Put Up or Shut Up, or PUSU deadline. And that is a requirement whereby once a possible offer has been announced, any named bidder such as the bidder who has made the bear hug announcement has to either announce a firm intention to make an offer, or otherwise announce that it does not intend to make one within 28 days after that announcement. And if it does walk away at the end of that 28-day period, it will be bound by the restrictions on not making a bid for six months, i.e., it won't be able to come back during that six-month period subject to certain limited exceptions.

Jade Jack: And can that deadline be extended?

Harry Thimont: It can, but then the extension is very much at the gift of the target. So the target board can request an extension, and typically with the panel consent it will be granted. So in a hostile scenario, the bidder is in effect ceding control of the timetable to the target board at the time that it issues its possible offer announcement. Now, the so-called PUSU technology was introduced about 15 years ago, generally with a view to helping target boards defend against siege, which is one of the concepts which underpins general Principle 6 of the code. Now, clearly a 28-day deadline is very tight when you think about what a firm offer announcement entails. The firm offer announcement is a binding statement of intent, which the bidder must follow through except in certain exceptional circumstances. And in addition, one of the requirements is that where cash is being offered, whether in whole or in part, the bidder must have sufficient resources to satisfy full acceptance of the offer, meaning that it needs to have its financing fully in place at the time of any firm offer announcement.

So I think the message for bidders who are contemplating going down the route of a bear hug, is that it is not a route that should be undertaken lightly. Preparation is critical. Otherwise, a bidder can put itself under a lot of pressure.

Jade Jack: Thanks. And of course, target boards probably don't react very well to being put under public pressure in this way. So a third risk might be that a bear hug entrenches a defensive stance on the part of the board, encouraging them to dig in rather than to engage, although obviously always subject to their fiduciary duties. So thanks. That's a really useful balance sheet of pros and cons. And perhaps we can now talk about how these announcements have actually played out so far this year. So Tom, perhaps you could take examples of where we have seen bear hugs work.

Tom Mercer: Yeah, certainly Jade. And it's noticeable reflecting on Harry's comment just now, that the number of bear hugs in the market definitely went down, certainly at the large cap end of the market, after the rule change back in 2011, which followed the bitter takeover of Cadbury by Kraft where a bear hug was used to good effect in terms of the bidder's ambitions about the target. As I mentioned earlier, it does seem that that price dislocation in the market, well-published issues around valuation of UK equities has resulted in this tactic becoming vogue again. And there are at least three high profile successes at the large cap end of the market where bidder announcements of possible terms, whether you call them bear hugs or not, have yielded the result the bidder wanted. I mentioned Prologis's £14 billion offer for SEGRO. Similar tactics were adopted on EQT's £9.3 billion offer for Intertek and Xerox £8.1 billion offer for Beasley.

And the common thread in each case is that the bidder raised its price publicly several times to secure a board recommendation, which was ultimately forthcoming, before announcing the formal offer. And it's another good reminder that, as Harry said earlier, bear hugs shouldn't really be confused with outright hostile offers. Often they're a means to an end, that is securing a recommendation on what ends up being a friendly offer, even if it's grudgingly friendly from the perspective of the target board.

Jade Jack: And in each of those cases, the bear hug did exactly what it was designed to do. So it got the board to the table and it ended in the recommended deal.

Tom Mercer: Yeah, exactly. It's not an out-and-out declaration of war at the time you'd expect with a hostile offer. It's a negotiating tool, albeit one which from the perspective of the targets board may be regarded as strong arm tactics. And of course, that's why the panel introduced the put up or shut up regime all those years ago to try and level the playing field a little bit there and put some power back in the hands of the target board.

Jade Jack: But we have also seen it lead to genuinely hostile offers, haven't we? Harry, perhaps you could touch on a couple of those.

Harry Thimont: Yes. So contrary to what I said earlier, there are clearly some examples where the bear hug was used in a more hostile way. So Glenstone's offer for Alternative Income REIT and Brave Bison's offer System 1 are two notable examples. I think importantly in both cases, the bidders already held a significant stake in the target company in excess of 20%. And I think to my earlier point around interloper risk, a stake at that level does reduce to a degree interloper risk, and therefore one of the downsides that we talked about is less likely to be relevant on these fact patterns. Indeed, in both cases, the bidders did also increase their offers, and that was after the initial Rule 2.7 announcement. And in both cases that was designed to secure support from shareholders.

Now, the System 1 takeover remains ongoing, but Glenstone did ultimately prevail, and perhaps not unsurprisingly, they did secure a late board recommendation. The reason I say not unsurprisingly, is because it was only after the offer had been declared unconditional. And in that scenario, most target boards will view the game is up, so to speak, and therefore recommending that shareholders accept to avoid being left with shares in an unlisted company is a relatively common path to go down at that particular point in a transaction.

Jade Jack: Thanks, Harry. And I think the point you raise about the existing stake and the power that holding an existing stake, whether it is just getting you closer to control, or it could potentially be used to block a rival offer, that's a really important one. And it is interesting that the two examples given in both cases, they hold 20% or more. So the hostile route becomes, I think, considerably more attractive in that, or perhaps just more viable in those circumstances. But of course, not every bear hug ends with the bidder securing the target, and we've seen a few cases where the bidder has actually fallen away as well. Tom, are you able to talk us through some of those cases?

Tom Mercer: Yeah, certainly. And really those scenarios where it doesn't work are exemplified in two different ways in recent months. The first I would call out arguably is Castlelake's possible offer announcement relating to EasyJet, where the interloper risk that you mentioned crystallized. There was a public price negotiation in relation to Castlelake's approach that followed the announcement, but that seems ultimately to have enabled EasyJet to secure a recommended offer from a competing bidder, Apollo, that obtained strong irrevocable commitments from the founder.

There were also cases where the panel's PUSU deadlines did its job effectively, both the Railways Pension Trustee Company and Fitzwater Capital bids for respective targets were timed out by the boards effectively saying, "No, we're not going to extend." And that's quite a brave decision from a board, but one which the rules, if not encourage, certainly envisage in terms of how the PUSU regime works. So both of those examples, crystallizing interloper risk or allowing a target board to time a bidder out on a PUSU deadline are examples of where the bear hug tactic not so much backfires, but can certainly fail to deliver the desired outcome.

Jade Jack: Certainly for the bidder, but I think that brings us quite neatly onto how targets might respond to these announcements. So Harry, if you are advising a board facing a bear hug, what tools do you have? What do you do?

Harry Thimont: Well, I think the starting point for any target board is that there is no obligation to engage with bidders, and certainly there's no obligation to open the books. I think it's probably fair to say that these days it's relatively rare for bidders to be willing to announce a formal offer without access to non-public information to do some level of due diligence. And so not having access to that due diligence, or potentially not getting access to the due diligence by adopting the bear hug route can be a little bit of a deterrent for a bidder, and therefore it is something in the toolbox that the target board has in how it handles that situation. And one of the reasons why target boards are understandably cautious about giving access to non-public information, perhaps prematurely, or in circumstances where they don't think they want to do so, is because once the books are opened, they effectively remain open to any other potential bidder who requests that information, even one that is potentially less welcome than the first bidder.

So boards can and often do restrict access to information in takeover situations, certainly unless and until an agreement is reached in principle on price.

Jade Jack: So due diligence in public takeovers can be a real bargaining chip?

Harry Thimont: Yeah, absolutely. And I think beyond that, preparation is everything. We routinely encourage boards of directors to prepare defense books, prepare their arguments in advance, and to encourage them to ensure that they are clearly able to articulate their strategy, identify the standalone value, and that's before an approach even lands. I think regular engagement with shareholders is also critical to one of the earlier points that was made around bidders going direct to shareholders. In that scenario, it is far easier for a target board to defend when it genuinely understands shareholders' motivations and views on, among other matters, price. And even where a board does decide to give access to due diligence information, it is commonplace in return to receive what we call standstill arrangements, effectively arrangements that prevent a bidder from going hostile.

The quid pro quo therefore is normally that access to non-public information means not going hostile. And as we've also discussed, target boards can always use the PUSU deadline to hold a bidder's feet to the fire and potentially to get rid of unwanted bidders.

Jade Jack: And you mentioned understanding your shareholder base. So the more rapidly evolving shareholder register that we see these days, that can make this very difficult for targets and their advisors, can't it? Tom, how are we seeing this play out in practice?

Tom Mercer: Well, one of the hardest things for a target board about a bear hug or a virtual bid, is not just having to play out arguments in relation to the valuation of the company and future strategy in public, but the effect it has on the company, its people, its customers, its suppliers, and also its shareholder register. Shareholder registers will often churn significantly following the announcement of a possible offer, and sometimes that can be self-fulfilling in relation to the possibility of a bid. A point that was clearly called out by the Panel in 2011 when it introduced the PUSU regime following the Kraft-Cadbury case. This happens because seemingly loyal long-term holders will often sell a part of their holding in the event of a possible offer for a company capitalizing on the share price increase. And the buyers are often short-term holders, hedge funds, event-driven investors who would be very happy to make a quick return, particularly if they've made a leveraged investment. You can also get activist shareholders coming onto the register agitating for change.

So it's a time of great instability in relation to the shareholder register. And often those shareholders that a board has cultivated a relationship with over time will, to some extent rather vanish in these situations, which makes them all the more difficult to react to. Having said which, going the other way, the falling number of UK listed companies has put pressure on some investors to stay invested in particular companies or sectors, because there's simply fewer alternatives to redeploy their capital. So that creates a dynamic that can sometimes go the other way as well in terms of shareholder sentiment towards possible offers. And that may be an explanation as to why in some cases boards are emboldened to time potentially hostile bidders out on PUSU deadlines.

Harry Thimont: And I think all of those dynamics are constantly shifting, very deal specific, and underlying the importance of regular engagement with your shareholder base. And I think from a deal execution perspective, the upshot these days is that a board recommendation is not necessarily an insurance that shareholders will support a particular deal. But likewise, the fact that a board rejects a proposal doesn't necessarily guarantee that the company's shareholders will also reject it, hence the rise in bear hugs, possible offers, etc.

Jade Jack: That's really interesting, thanks. So if we then flipped it around, Tom, you are advising a bidder on making a bear hug announcement. What's in your playbook?

Tom Mercer: Well, preparation is key. The bear hugs that go wrong can be embarrassing for the bidder, particularly if they crystallize an interloper, or you simply get timed out or you simply get a rousing rejection from shareholders. So you've got to do your analysis in advance. Ideally, you've also got to be in a position where within 28 days of releasing your bear hug announcement, you're ready to go. It's wrong to assume that you'll definitely get an extension of a PUSU deadline. And again, therefore the risk of egg on face if you don't is significant. That's not to say that everyone who does a bear hug would be willing to go with a hostile offer within 28 days. Some will chance it on the basis that they think it's inevitable, they'll get there on a recommended basis having secured the board recommendation with lobbying from shareholders. But it's an important point to be careful about, particularly for advisors.

Following the release of the bear hug announcement, shareholder engagement is obviously absolutely key, and really making sure that shareholders are not just mildly supportive of the proposal, but willing to lobby the board to ensure that DD access is granted and PUSU deadlines are extended. One of the ways in which bidders can seek to get that sort of pressure put on boards and obtain the support of shareholders, is through some of the tactics you sometimes see combined with bear hug announcements around declaring possible offers even before they've been made best and final, the classic no increase statement, which prevents holdout shareholders from playing hard to get in order to potentially get the price up. But again, these need to be used very carefully. And if you are preparing a no increase statement, you need to be super careful about the carve outs to ensure, for example, that the no increase statement can be set aside if an interloper does emerge.

The other tactic we often see hand-in-hand with bear hug virtual bid announcements is stake building, potentially picking up shares from shareholders who were happy to sell at the prevailing price following the announcement of the bear hug. And this has been used to good effect in recent deals, including on Glenstone, and where it can really change the dynamic.

Jade Jack: And so stepping back for a moment then, why do we think bear hugs have come back now?

Harry Thimont: Well, I think fundamentally it comes down to valuations, whether perceived or actual, it is clear that there is a lot of talk around the undervaluation of UK public companies and I think a disconnect has been created as a result. And that's not just between the target boards and bidders, but also between target boards and their own shareholders. For example, a board may think that an offer significantly undervalues the company and its prospects, whereas shareholders potentially who have been in for a while, seen their share price languish, have limited liquidity, consider it to be a good opportunity for an exit.

Tom Mercer: Yeah, I totally agree. And if we lived in a world where equity valuations were perfect with perfect pricing, you shouldn't logically need bidders to have to resort to bear hug announcements, because they should be able to price offers at a level which boards are willing to proceed with and which shareholders are happy with. So I think Harry's point, which really that the driver for these is perceived undervaluation in UK equities, is absolutely right.

Jade Jack: So perhaps it's less of a return to fully hostile deals, but more of a return to strong arm tactics. Do we have, or maybe I could ask each of you, for any quick final thoughts on the matter?
Tom Mercer: I think looking at it from the perspective of the target company, as Harry's already mentioned, preparation is key. Don't wait for the approach. Understand your shareholder base, at least your current shareholder base, and have your case ready, and have ideally a response announcement to a bear hug fully verified. And that includes making sure that any profit forecast or asset valuations can be repeated under the code. These are the sorts of things all target boards in the UK right now should be focused on.

Harry Thimont: Yeah, I agree with all of that. And I think for bidders, again, the key is being prepared, and in this case, it's having one eye on your firm offer announcement, i.e. fully financed, happy with whatever due diligence the bidder may or may not have been able to have done, and only going public with a bear hug when you are ready to follow through with a firm offer, on the basis that that 28-day clock starts ticking from the moment that bear hug goes out.

Jade Jack: That's great. Thank you to both of you for your time, and to our listeners for joining us. We hope you found it interesting. For the Q3 report and for more information on our public M&A group, please take a look at our website. And of course, it goes without saying that if you would like to discuss any of the points raised in the materials, or have more general questions around UK public M&A, please do get in touch. You'll be able to find all of the team's details on the website.

Thanks again for your time, and please do share the podcast with interested colleagues. Bye for now. Until next time.