Reviewed by Oct 05, 2020| Updated on
A dawn raid is a strategy used by corporates to gain a substantial share in a target company, usually as part of a hostile takeover bid. The corporate planning the dawn raid instructs brokers to buy shares in the target company at the start of trading for the day.
As this is done through brokers, it masks the identity of the acquirer. As it is done at the start of a trading day, it may take a few hours for the target to learn that its shares have been acquired. By this time, it is often too late to react, as the target shareholders could have lost control of the company.
While in theory, a dawn raid could result in the hostile takeover of a target company, it does not occur in practice due to restrictions placed by the stock markets. Any acquisitions of more than 5% of stake in a company require a formal disclosure to be made. Hence, the acquisition of a company cannot be made as a surprise through a dawn raid.
Further, due to the transparency of information that exists today in the stock markets, a company facing a dawn raid often gets to know before the event, or as the event is underway. Hence, in practice, a dawn raid does not result in a hostile takeover but is definitely the first step towards the acquisition of a majority stake.
Possibly the only advantage of a dawn raid is that the acquiring company acquires a reasonable stake in the target, at probably a lower price than would be seen during intra-day trading.
If company X wants to acquire a stake in company Y as part of a takeover bid, it would need to offer company Y a premium for its shares, in the event of a formal offer being made. Hence, company X instructs its brokers to acquire all shares available first thing in the morning, as soon as trading opens, as part of a dawn raid, to help gain a controlling interest in company Y.
However, this practice cannot be followed anymore, as acquiring a stake greater than 5% will require formal documentation to be done. Hence, after a dawn raid, company X, which could acquire up to 5% of company Y, will need to make a takeover bid in order to acquire the rest of company Y.