Premium Raid

What is 'Premium Raid'

Premium raid is an action akin to a hostile bid for a company involving the acquisition of large blocks of shares directly from shareholders at a premium over the current market value of their shares. This tactic is most likely to be used in an unfriendly takeover situation, where the acquiring company prefers to bypass the target company's Board of Directors and take its offer directly to the shareholders.

BREAKING DOWN 'Premium Raid'

The ultimate objective of a premium raid for a corporate raider or acquirer is to accumulate enough ownership in a company so that it can wage a proxy battle for control. Major shareholders will not relinquish their shares easily, so the raider must entice them with an attractive premium price. In certain cases, a premium raid can prove to be quite costly for the acquiring company. This may occur if the premium offered to the target company's shareholders is too high, or if the acquirer is forced into a bidding war with another bidder or a white knight who has the support of the target company's board. Whether the premium is "too high" can be judged in a number of standard takeover valuation methods such as comparable transactions, discounted cash flow (DCF) analysis and ratio analysis. A corporate raider, by definition, is aggressive, and its willingness to offer a significant premium to obtain shares may be greater than an interested party that approaches a takeover in a conventional way, which is to first contact the target's Board of Directors in private. Premium raids will work if the bid price is high enough for large investors to sell their shares to the raider. They can walk away with tidy gains; however, if the company ends up in the hands of the raider, the company itself may be adversely impacted by the hostile party that now must recover its high costs to win control. Sale of assets and employee layoffs would likely take place.