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What Is A Dawn Raid
In mergers and acquisitions, a dawn raid is when an acquiring company purchases a large number of shares in a target company immediately upon the opening of the stock market.
It’s called a “dawn” raid as the objective of the acquiring company is to purchase a substantial amount of shares when the trading day opens so the target company becomes aware of the acquisition when the transaction is already completed.
To reduce its acquisition cost, the acquiring company will want to purchase as many shares of the target company at its current market price without making any public announcements or disclosing its interest to the securities exchange for as long as it can legally do so.
When the acquiring company’s share interests eventually exceed a certain threshold, it must eventually file formal documentation to disclose its equity interest in the target.
When the public becomes aware that an acquirer has increased its holdings in a company, that can influence the stock price making it more costly for the acquirer to purchase additional shares at the going rate.
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Dawn Raid Definition
How do you define dawn raid in business?
According to Investopedia, a dawn raid is defined as follows:
A dawn raid refers to the practice of buying up a large amount of shares right at the open of the day’s trading
As you can see from this definition, the dawn raid is a share acquisition strategy where the acquirer purchases a certain number of shares as quickly as possible when the stock market opens.
This way, before the market becomes aware of the potential takeover plans of the acquirer, the shares are purchased at the prevailing market price.
Objective of Dawn Raids
The main objective of a dawn raid is for an acquiring company to purchase shares in a target company at a discount.
When the market becomes aware that a company is looking to purchase another company, the value of the target company’s shares may go up and start trading at a premium.
To reduce the cost of acquisitions, the acquirer will want to purchase as many shares as it can legally do so without having to file any legal disclosures or have the market become aware of its intentions.
In theory, the dawn raid allows the acquirer to purchase a large number of the target shares before anyone becomes aware of it.
However, in real-life, it may be hard to purchase a large number of shares without the market becoming aware of it.
With the use of technological tools and artificial intelligence, some market players may quickly discover that a company is taking up a large number of shares in another company.
For this reason, the dawn raid may not necessarily result in the purchase of the share position at a discount.
Nonetheless, the dawn raid may offer the acquirer some acquisition cost savings.
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Why Dawn Raids In Takeovers
Dawn raids are effective as it allows an acquiring company to purchase a minority interest in a target company at the prevailing stock price.
Typically, a company purchasing less than five percent of another company’s shares does not have to file any legally mandated disclosures or issue a press release.
As a result, a company looking to take over another company may want to purchase the shares of the target company below this threshold in such a way that the acquirer does not become aware.
This is when a dawn raid can be effective.
Using the dawn raid strategy, the acquiring company will purchase a minority interest (generally right below five percent) in the target right at the opening of the stock market.
Then, when the acquiring company’s position exceeds five percent, it will file formal documentation with the SEC and applicable securities exchanges.
That’s when the stock price of the target may go up when investors discover the acquirer has increased its equity interests in the target.
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Takeaways
So there you have it folks!
A corporate dawn raid refers to an early morning acquisition, by an acquiring company, of a substantial number of shares of a target company.
When nobody is aware that the acquiring company is looking to significantly increase its share position in the target company, the acquirer has already purchased a large number of shares.
Then, when the acquirer’s share position exceeds a certain threshold, it will then file the necessary documentation with the securities commission and ultimately the market finds out.
Typically, the corporate raider will pursue a takeover strategy by making a takeover bid to acquire a controlling interest in the target company’s shares.
Now that you know what is a dawn raid in M&A, good luck with your research!
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