Takeover in Europe: Target characteristics and acquisition likelihood

Abstract

This article analyzes characteristics of takeover targets in the European market—relatively less studied compared with US and UK markets—to develop a takeover prediction model. Our sample includes 320 European companies with 140 targets and 180 non‐targets over the period 1994–2007, covering two M&A waves. In this study, we test the discriminating power of many relevant variables including new one that could have a discriminating power in potentially determining (value creation). Our results show that European targets are characterized by a growth‐resource imbalance, are less rich in FCF, have growth opportunities, have a higher level of transaction volume of shares prior to the bid, achieve lower economic performance, and destroy value. Furthermore, we develop several predictive models using targets' financial data from 1 year, 2 years, and 3 years before takeover, along with the 3‐year average. The correct classification power in the original sample is 70% (in‐sample). As for predictive ability, the correct classification power in a control sample is 79.4% (out‐of‐sample). We also noted that predictive models using data from 1 or 2 years before the bid appear to display more significant predictive ability.