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Dawn Raid

The sudden sweeping purchase by a potential acquirer of a substantial number of a target company’s shares at the start of market trading

What is a Dawn Raid?

A dawn raid refers to the sudden sweeping purchase by a potential acquirer of a substantial number of a target company’s shares the moment the market opens (“dawn”). A dawn raid is enacted by the shareholders from a company that is attempting to take over the target company. It is usually viewed as one method to effect a hostile takeover.

 

Dawn Raid

 

Hostile Takeover

A takeover is fairly common in the business world. A company – usually because of financial distress or because the board of directors determine it’s appropriate – merges with or is acquired by another corporation. In the case of a normal takeover, the board of directors or representatives of the target company meet with the representatives of the acquiring company and establish and agree upon the merger/takeover terms.

In the event that the board of directors or management team of the target company is not agreeable to a merger, the acquiring company may resort to a hostile takeover. It means that the targeted company’s board or management team will not agree to the terms proposed by the acquiring company.

A company can facilitate a hostile takeover a number of ways, including a Godfather offer – where the acquiring company offers the target’s company shareholders a hugely favorable deal in order for them to tender their shares to the acquirer. A dawn raid is another commonly-used takeover strategy.

 

Example of a Dawn Raid

In most cases, a company will make an attempt to acquire a targeted company through amenable avenues. However, if such attempts don’t work, a dawn raid is a viable option.

For example, let’s assume that Company A is trading at $8 per share. Company B wants to take over Company A, for whatever reason (usually because they see that Company A is undervalued and is liable to increase in value in a significant way). The moment that the market opens in the morning – dawn – Company B will purchase a massive amount of Company A’s outstanding shares – ideally at least 51%, a controlling interest in the company – in order to acquire it.

The share purchase grants Company B a controlling interest in Company A, meaning the former can restructure the board of directors and management team of the latter so that it will agree to Company B’s merger terms.

 

Dawn Raids as a First Step

In reality, a dawn raid is often not sufficient to grant the acquiring company a 51% or greater controlling interest in the target company. In most examples of dawn raids, the acquiring company makes a purchase large enough to give them a significant minority interest in the target company. It will then gradually move from there to the point of successfully taking over the target. The acquirer may accomplish its ultimate objective through more share purchases or simply coming to agreeable terms with the target company to buy out the current owners’ shareholdings.

 

Related Readings

CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful:

  • Creeping Takeover
  • Control Premium
  • Friendly Takeover
  • Poison Pill

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