What is a Dawn Raid?
Imagine you are playing a strategy game with your friends. You want to take over your enemy’s base, but they have a strong defense. You decide to surprise them by attacking them early in the morning, when they are still asleep. You quickly capture most of their territory and resources, and then demand that they surrender or join your team.
This is similar to what happens in a dawn raid in the business world. A dawn raid is when one company tries to buy a large number of shares of another company as soon as the stock market opens. The goal is to gain enough control over the target company to influence its decisions or take it over completely. A dawn raid is usually done secretly, without the target company’s knowledge or consent. It is frequently used as part of a hostile takeover strategy, which means that the target company does not want to be acquired by the bidder.
Why Do Companies Do Dawn Raids?
Companies do dawn raids for various reasons, such as:
- To get a competitive advantage over their rivals
- To access new markets, customers, or technologies
- To diversify their products or services
- To reduce their costs or increase their profits
- To prevent another company from taking over the target company
A dawn raid can also help the bidder save money and time, compared to making a formal offer to the target company’s shareholders. By buying a large number of shares at the market price, the bidder can avoid paying a premium or negotiating with the target company’s board of directors. However, a dawn raid also involves some risks, such as:
- The target company may resist the takeover attempt by taking legal action, seeking a white knight (a friendly bidder), or adopting poison pills (measures that make the takeover more expensive or difficult)
- The bidder may face regulatory hurdles or opposition from the government, the public, or the employees of the target company
- The bidder may overpay for the shares or fail to achieve the expected benefits from the takeover
How Does a Dawn Raid Work?
A dawn raid works as follows:
- The bidder identifies a target company that has a low share price, high growth potential, or strategic value
- The bidder hires a broker or a bank to buy the target company’s shares on its behalf, using cash, loans, or derivatives
- The bidder instructs the broker or bank to buy as many shares as possible, as quickly as possible, as soon as the market opens
- The broker or the bank executes the order, using multiple accounts, platforms, or markets to avoid detection
- The bidder announces its stake in the target company and its intentions, either to make a friendly offer, a hostile bid, or a merger proposal
Depending on the size of the stake acquired, the bidder may have to disclose its identity and its shareholding to the target company, the stock exchange, or the regulator. In some countries, the bidder may also have to make a mandatory offer to buy the remaining shares of the target company, if it crosses a certain threshold.
Examples of Dawn Raids
Some examples of dawn raids in history are:
- In 1986, the Australian tycoon Robert Holmes à Court launched a dawn raid on the British media company Associated Communications Corporation (ACC), buying 20% of its shares in one day. He later sold his stake to another bidder, making a huge profit.
- In 1988, the French conglomerate Compagnie Générale d’Electricité (CGE) conducted a dawn raid on the British engineering company Plessey, acquiring 13% of its shares in two hours. It then teamed up with another bidder, Siemens, to take over Plessey in a hostile bid.
- In 2007, the Dubai-based investment firm Dubai International Capital (DIC) carried out a dawn raid on the British bank HSBC, buying 3% of its shares in a few minutes. It then increased its stake to 5%, becoming the largest shareholder of HSBC.
Accounting Treatment of Dawn Raids
The accounting treatment of dawn raids depends on the method of payment, the percentage of ownership, and the degree of control or influence acquired by the bidder. Generally, the following rules apply:
- If the bidder pays cash for the shares, it records the purchase as an investment in equity securities, either at fair value or at cost, depending on the level of ownership and the accounting standards followed
- If the bidder pays with its own shares, it records the purchase as a stock swap, either as a merger or as an acquisition, depending on the relative size and power of the parties involved
- If the bidder pays with a combination of cash and shares, it records the purchase as a hybrid transaction, using the appropriate methods for each component
- If the bidder obtains a controlling interest (more than 50%) in the target company, it records the purchase as a business combination, using the acquisition method or the pooling of interests method, depending on the accounting standards followed
- If the bidder obtains a significant influence (between 20% and 50%) in the target company, it records the purchase as an equity method investment, recognizing its share of the target company’s income and changes in net assets
- If the bidder obtains a passive interest (less than 20%) in the target company, it records the purchase as a fair value method investment, recognizing changes in the fair value of the shares as gains or losses
Summary of Dawn Raid
Here is a list of bullet points that summarize the main points of the term dawn raid:
- A dawn raid is when one company buys a large number of shares of another company as soon as the stock market opens
- A dawn raid is usually done secretly, without the target company’s knowledge or consent
- A dawn raid is often part of a hostile takeover strategy, which means the target company does not want to be acquired by the bidder
- A dawn raid can help the bidder gain control, access, or advantage over the target company, but it also involves some risks and challenges
- A dawn raid works by hiring a broker or a bank to execute the order, using cash, loans, or derivatives
- A dawn raid may require disclosure, reporting, or mandatory offer, depending on the size of the stake acquired
- A dawn raid is accounted for differently, depending on the method of payment, the percentage of ownership, and the degree of control or influence acquired
