A premium raid occurs when one company attempts to gain control over another by buying a large block of stock shares of the target company. This is usually done at a premium to the market price of the shares, making it desirable for current shareholders to sell. In most cases, a premium raid is conducted as part of a hostile takeover of a company when negotiations with current management for a possible sale are not fruitful. Certain regulations have been put in place in the United States requiring companies attempting such a tactic to disclose the complete motives for their actions so that shareholders can respond accordingly.
When one 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 name or it might inhabit a market that the buying company wants to secure. If the target company is unwilling to sell to the potential buyer, the buyer may move on the shareholders of the target company in a backdoor attempt to get control. Such a strategy is usually executed by using a tactic known as a premium raid.
In a premium raid, the buying company will go to shareholders with a bid 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 shares that are far higher than, or at a premium to, the current market price. For example, if the market price for a specific stock was $10 US Dollars (USD) per share, the buyers might offer shareholders $20 USD per share.
As a result, shareholders are often hard-pressed to resist the lure of a premium raid. In some cases, the targeted company may respond by securing the assistance of a so-called “white knight” investor, who has the blessing of the company and can try to outbid those attempting the hostile takeover. Such a situation can drive share prices up to the point that a takeover proves too costly.
Of course, such tactics can put great pressure on stockholders to make decisions regarding the future of a company. If they are unaware of the motives of a company wishing to take over, they might regret selling their shares 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 make its motives for the purchase clear.