Dawn Raid Meaning
Dawn raid is the strategy of acquiring shares of a company in which an investor buys or acquires a significant amount of shares in the morning that is when the stock market opens, in this manner the acquisition is done at a very low price in comparison to an announcement by the investor with the intention to acquire which will lead to an increase in the stock price.
Explanation
Dawn Raid is a term of British origin and is popularly used in the context of UK takeovers. It involves purchasing a large shareholding in a target company in a short period before any formal announcement of a hostile takeover is made public. It is used to describe the attempt made by the potential bidder to acquire a significant stake often at the opening of the trade to position the investor for a potential takeover bidTakeover BidThe price offered by the acquiring company to the target company to purchase the company is known as a takeover bid. Such bids are typically placed by larger companies to buy smaller companies in the market and the bids can be in the form of cash, equity, or a combination of both.read more.
As we note from the above Dawn Raid example, Chinalco and Alcoa jointly bought a 12% stake in Rio Tinto’s London based shares.
- Under this, the investor or acquirer company instructs its broker to buy as big a stake as possible by acquiring the shares available in the company as soon as the stock market opens and trading begins without the market or the management of the target noticing.
- By acquiring such large stakes, the investor or acquirer company is able to reduce its takeover cost as it might have already acquired a large number of shares before the formal announcement of the takeover and will have to acquire less number of shares after the announcement to gain significant stake for attaining majority control on the target company.
- It is important to note here that it helps investor or Acquirer Company to reduce its takeover cost substantially as acquiring shares before making a formal announcement for takeover is comparatively more cost effective than the cost to be incurred after a formal announcement of takeover is made as such information will result in advancing up the prices of the shares of the target company which will result in more cash outflow for acquirer company.
- It is a stock market operation in which a large proportion of a company’s shares are suddenly bought, often anticipating a takeover bid. With a successful Dawn Raid, the raiding firm makes a takeover bid to acquire the rest of the company.
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For eg:
Source: Dawn Raid (wallstreetmojo.com)
Examples
Heal International Limited is a leading manufacturer of generic medicines based out of London and intends to acquire Faze International Limited, which is also in the same line of business of formulation and generic medicine with a large market share in areas that are not covered by Heal International Limited. Heal International intends to takeover Faze International Limited using a Dawn Raid takeover strategy. The shares of Faze International are currently listed on the London Stock Exchange (LSE) and trades at $40 per share.
Heal International using this strategy, succeeded in acquiring up to 30 percent stake by acquiring shares of Faze International from the open market and, after that, made an open offer for the acquisition of controlling stake (51 percent). If Heal International would have made a formal offer to buy 51 percent in Faze International, it would have to offer a premium to the existing price ( $40 in this case) and would have resulted in millions of dollars more. Thus using Dawn Raid, Heal International succeeded in acquiring a significant stake and saving million dollars in the acquisition.
History and Purpose
- The Takeover Panel through its Substantial Acquisition Rules, popularly known as SARs, earlier used to provide a delaying mechanism for the way in which acquirer companies or investor can acquire up to 29.9 percent stake in a company through the Dawn Raid Strategy and were originally designed to prevent such hostile takeover and allow management to advise their shareholders before it was too late to influence the course of events.
- Under the said rules, a bidder could buy only a 14.9 percent stake at one time, wait a week before buying a further 9.9 percent and wait another week before acquiring another 4.9 percent. These rules were framed with the intention to allow the target company to react to the bid and advise their shareholders.
- However, with the dropping of the formerly imposed rules discussed above, a bidder (which can be an acquired company or an investor) can purchase shares up to 30 percent of the shares in the target company as fast as it can through a Dawn Raid. However, once the bidder has acquired a 30 percent stake, they must formally announce the bid.
- These save a lot of money for the raiders or acquirer and is a good alternative to making a formal offer as that would involve paying a premium to shareholders from the traded price of the share of Target Company. These are also beneficial to the shareholder of the Target Company as post-Dawn Raid also, the acquirer has to compulsorily make a formal takeover bid, which is usually a premium to the existing price.
Conclusion
Mergers, AcquisitionsMergers, AcquisitionsA merger and acquisitions (M&A) agreement refers to an agreement between two existing companies to merge into a new company, or the purchase of one company by another, which is done generally to benefit from the synergy between the companies, expand research capacity, expand operations into new segments, and increase shareholder value, among other things.read more, and Takeovers are part of the business world, and companies keep pursuing them to increase shareholder valueShareholder ValueShareholder's value is the value that company shareholders receive as dividends and stock price appreciation due to better decision-making by the management that ultimately results in a company's growth in sales and profit.read more. It is a corporate action most popular in the UK where a company tries to acquire control through a hostile bid aiming at acquiring as many shares as possible of the target company early in the morning before the target firm becomes aware of the acquirer’s true identity and intent.
- It is a very offensive tactic and due to its inherent technique of acquiring a large number of shares in the morning as the capital marketCapital MarketA capital market is a place where buyers and sellers interact and trade financial securities such as debentures, stocks, debt instruments, bonds, and derivative instruments such as futures, options, swaps, and exchange-traded funds (ETFs). There are two kinds of markets: primary markets and secondary markets.read more opens it results in an increase in the demand of shares which soar up the stock prices further and this result in stock prices quoting higher which lead to increase in the cost of acquisition. Furthermore, the strategy is not fit for all countries as some country’s regulation requires that Dawn Raid can’t be more than 15 percent (Indian context) and beyond that, an open offer is compulsory to be made.
- Secondly, acquiring such a large number of shares from the open market requires adequate liquidityLiquidityLiquidity shows the ease of converting the assets or the securities of the company into the cash. Liquidity is the ability of the firm to pay off the current liabilities with the current assets it possesses.read more, which is also situational and may not be available all times, thereby impacting the prices of the shares.
- Thus we can say that Dawn Raid as a takeover strategy has its own merits and demerits, and the acquiring company can opt for the same based on its current state of affairs and the target company which it intends to acquire.
Dawn Raid Takeovers Video
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