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 typically undertaken by a potential acquiring company in the context of a hostile takeover attempt.

Hostile Takeover

Takeovers, whether friendly or hostile, are fairly common in the business world. The target company merges with or is acquired by another corporation. In the case of a friendly 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.

However, if 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.

A company can facilitate a hostile takeover in a number of ways, such as using a Godfather offer: the acquiring company offers the target company’s shareholders a hugely favorable deal, a price well above current market value, in return for them selling 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 one viable option for obtaining control of the target firm.

For example, let’s assume that Company B wants to take over Company A, for whatever reason (usually because they see that Company A offers some value or advantage that Company B can use to increase revenues and profitability). The moment that the market opens in the morning – dawn – Company B attempts to purchase a massive amount of Company A’s outstanding shares – ideally at least 51%, which will give Company B a controlling interest in Company A.

Once it has obtained a controlling equity interest, Company B can restructure the board of directors and management team of Company A 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 instances, the acquiring company makes a purchase large enough to give them a significant minority interest in the target company. It can then gradually move from there to the point of obtaining a majority, controlling interest in the target.

The acquirer may accomplish its ultimate objective through more share purchases, or simply by coming to agreeable terms to buy out the owners of the target firm. The target can negotiate more favorable terms if it undertakes negotiations while the acquirer has less than a controlling interest.

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 CFI resources will be helpful:

• Creeping Takeover
• Control Premium
• Friendly Takeover
• Poison Pill
• See all valuation resources
• See all equities resources