Characteristics and Predictability of Companies' Acquisitions; Empirical Evidence from Denmark 1993-1996

Abstract

The purpose of this paper is to derive and test several hypotheses on the characteristics of Danish acquisitions during the period from 1993 to 1996, and to try to estimate a statistical model for prediction of acquisition targets. We use binary and multinomial logit models, with variables expressed on firm and industry level. The sample covers a broad cross section of firms of different sizes and in different industries. In the period from 1993 to 1996 our results characterize targets as poor performing and financially distressed units when compared to their industry average, and to the control group of non merging companies. The findings are in support of the inefficient management hypothesis and to the more general view that acquisitions can serve as the managerial discipline device. These findings shed also some lights on the possibility of considering mergers and acquisitions as an alternative for bankruptcy avoidance. Acquirers are identified as companies in need for growth opportunities and better profitability. The models are tested for prediction accuracy on a holdout sample of firms in year 1997.