What Can a Schedule 13D Tell an Investor?

A Schedule 13D is a document that must be filed with the Securities and Exchange Commission (SEC) within 10 days of the purchase of more than 5% of the shares of a public company by an investor or entity. It is sometimes referred to as a beneficial ownership report.

This publicly available document provides useful information about majority ownership in the company. It reveals the name, ownership amount, and stated intentions of any investor who has purchased a substantial share of a company. The buyer may not intend an outright takeover or it might be purchased by an activist investor seeking more management input.

It also must indicate how the purchase is being financed.

Schedule 13D can be found in the EDGAR database maintained by the SEC. (EDGAR stands for Electronic Data Gathering, Analysis, and Retrieval. It's the SEC's tool for collecting, indexing and validating the information it requires public companies to submit.

When Schedule 13D Is Significant

The filing of a Schedule 13D has taken on significance in the financial industry as a takeover indicator.

Generally speaking, an acquiring company embarking on a friendly takeover will make a tender offer before acquiring any significant or additional holdings of a target company.

Hostile Takeover Strategy

In a hostile takeover, however, the acquiring company will often make a toehold purchase that falls below the minimum disclosure level. When the funding has been finalized and is in place, as with a leveraged buyout (LBO), the black knight will buy additional shares and then file the Schedule 13D and the tender offer simultaneously.

This strategy is intended to prevent competitors from bidding up the share price and making the acquisition more expensive. It also prevents the target from creating takeover defenses.

The Funding Disclosure

Investors and arbitrageurs often refer to the 13D to judge an acquisition's chances of success. Because the funding sources are disclosed, it's easy to see if the acquiring company is over-leveraging itself.

Over-leveraging can hurt the future earnings of both companies if the deal is completed.

The Schedule 13G

A Schedule 13G filing is specifically for entities that acquire between 5% and 20% without intending a takeover or any other action that will materially impact the company's shares.

If the investor is not passive or the ownership stake is above 20%, the buyer would have to file a Schedule 13D.

Schedule 13G is not a harbinger of a takeover. Occasionally, mutual funds and insurance companies find themselves going over the 5% margin merely because of the massive size of the funds they are managing.