What it is:
How it works/Example:
Let's say that Company XYZ owns 40% of Company ABC but wants to acquire a controlling interest in Company ABC. Company ABC is trading at $5 a share.
If Company XYZ wanted to make a formal to buy 51% of Company ABC, it figures it likely have to offer a 20% premium over the share price, or $6 a share, which could cost it millions of dollars more.
Company XYZ sees that $5 a share is a relative bargain and decides to do a dawn raid instead. The next morning, as soon as the markets , it buys everything in sight, quickly acquiring the number of needed to get to 51%. In this way, Company XYZ now has control of Company ABC. It immediately replaces the board, fires the CEO, and in its own management team.
In the real world, dawn raids are often used to acquire substantial minority interests and are thus a tip-off that the acquirer might make a tender offer or offer later.
Why it matters:
Dawn raids can save raiders a of because they are an alternative to making formal tender offers to shareholders, which often involve paying premiums. Dawn raids are done early in the morning so that the target is surprised and can do little about the matter once it realizes it's being attacked. When dawn raids are used to acquire minority interests, the often becomes a buy because investors anticipate that the new minority shareholder eventually make an to purchase the company.