What is a Dawn Raid?
In the finance world, a dawn raid is the purchase of a large number of shares or securities as soon as the market opens, usually in a takeover effort.
How Does a Dawn Raid Work?
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 offer to buy 51% of Company ABC, it figures it will 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 open, it buys everything in sight, quickly acquiring the number of shares 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 puts 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 takeover offer later.
Why Does a Dawn Raid Matter?
Dawn raids can save raiders a lot of money 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 stock often becomes a buy because investors anticipate that the new minority shareholder will eventually make an offer to purchase the company.