A premium raid is when a company attempts to gain control of another by purchasing a large block of its stock at a price above market value. This is usually done as part of a hostile takeover and regulations require companies to disclose their motives. Shareholders may resist and a “white knight” investor may outbid the hostile takeover.
A premium raid occurs when one company attempts to gain control over another by purchasing a large block of the target company’s stock. This usually occurs at a price above the market price of the shares, making the sale desirable for current shareholders. In most cases, a premium raid is conducted as part of a hostile takeover of a company when negotiations with current management over a possible sale are fruitless. Some regulations have been put in place in the United States that require companies that attempt such a tactic to disclose the full motives for their actions so that shareholders can respond accordingly.
When a company is struggling financially, it often becomes the target of another company looking to expand its business. The struggling company may have a desirable brand or it may inhabit a market that the acquiring company wants to protect. If the target company is unwilling to sell to the prospective buyer, the buyer can move onto the target company’s shareholders in an attempt to gain control of the backdoor. Such a strategy is usually done using a tactic known as premium raiding.
In a premium raid, the acquiring company will go to the shareholders with an offer for a large amount of stock, usually enough to wrest decision-making control from current management. To sweeten the offer, the company will offer prices for the stock that are far above or at a premium to the current market price. For example, if the market price for a particular stock was $10 US dollars (USD) per share, buyers could offer shareholders $20 USD per share.
As a result, shareholders are often forced to resist the lure of a premium raid. In some cases, the affected company may respond by enlisting the assistance of a so-called “white knight” investor, who has the company’s blessing and may try to outbid those attempting a hostile takeover. Such a situation can push stock prices to the point where an acquisition proves too costly.
Of course, such tactics can put great pressure on shareholders to make decisions about a company’s future. If they aren’t aware of a company’s motives for wanting to take over, they may regret selling their stock in a premium raid. As a result, regulations enacted in the United States make it necessary for any company wishing to acquire a substantial portion of a company’s stock to clarify its motives for the purchase.
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