Dawn Raid Meaning Examples How Such Takeovers Work

Dawn Raid Meaning

Explanation

A dawn raid is a term of British origin popularly used in UK takeovers. It involves quickly purchasing a large shareholding in a target company before any formal announcement of a hostile takeover is made public. It describes 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 possible 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.

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Examples

Heal International Ltd. is a leading manufacturer of generic medicines based out of London. It intends to acquire Faze International Ltd., which is also in the same formulation and generic medication line with a large market share in areas that Heal International Ltd. does not cover. Heal International Ltd. intends to take over Faze International Ltd. using a dawn raid takeover strategy. Faze International Ltd. shares are listed on the London Stock Exchange (LSE) and traded at $40 per share.

Using this strategy, Heal International Ltd. acquired up to a 30% stake by acquiring shares of Faze International Ltd. from the open market and made an available offer to acquire a controlling stake (51%). If Heal International Ltd. had made a formal offer to buy 51% of Faze International Ltd., it would have to offer a premium to the current price ($40 in this case), resulting in millions of dollars more. Thus, Heal International Ltd. acquired a significant stake and saved a million dollars in the acquisition using the dawn raid.

History and Purpose

The Takeover Panel, through its Substantial Acquisition Rules, popularly known as SARs, earlier provided a delaying mechanism for how acquirer companies or investors can acquire up to 29.9% stake in a company through the dawn raid strategy. Originally, it was designed to prevent such a 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% stake at one time, waiting a week before buying a further 9.9% and another week before acquiring another 4.9%. They framed these rules to allow the target company to react to the bid and advise their shareholders.With the dropping of the formerly imposed rules discussed above, a bidder (an acquired company or an investor) can quickly purchase up to 30% of the shares in the target company through a dawn raid. However, once the bidder has acquired a 30% stake, they may formally announce the bid.These save a lot of money for the raiders or acquirers and are a good alternative to making a formal offer. That would involve paying a premium to shareholders from the traded price of the target company’s share. These are also beneficial to the target company’s shareholders. Post-dawn raids, the acquirer has to compulsorily make a formal takeover bid, which is usually a premium to the current price.

Conclusion

Mergers, acquisitionsMergers, AcquisitionsMergers and acquisitions (M&A) are collaborations between two or more firms. In a merger, two or more companies functioning at the same level combine to create a new business entity. In an acquisition, a larger organization buys a smaller business entity for expansion.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 developing 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. Its inherent technique of acquiring many 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 increases the demand for shares, which soars the stock prices further. That results in higher stock prices, leading to a rise in acquisition costs. Furthermore, the strategy is not fit for all countries as some countries’ regulations require that dawn raids cannot be more than 15% (Indian context), and beyond that, an open offer is compulsory.Secondly, acquiring such a large number of shares from the open market requires adequate liquidityLiquidityLiquidity is the ease of converting assets or securities into cash.read more, which is also situational and may not be available at all times, thereby impacting the prices of the shares.Thus, we can say that the dawn raid has its own merits and demerits as a takeover strategy. 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 Meaning Examples How Such Takeovers Work