Predicting Norwegian takeover targets : an empirical analysis of the Norwegian M&A market

The prediction of takeover targets has been covered in several studies. However, it tends to be the same major stock exchanges that are subject to analysis. Based on 153 Norwegian public targets from 1995 to 2012, we develop the first takeover prediction model for the Oslo Stock Exchange. We find evidence for the propositions that firms with underperforming management and poor liquidity are more likely to become targets. To test the practical application of the model, we use it as basis for investment strategies. As our analysis on takeover announcement returns show that Norwegian firms experience a cumulative average abnormal return of 14.7% over a [-50,50] window, a successful investment strategy could be highly profitable. Thus, we use the takeover prediction model on Norwegian market data from 2013 to 2016 to classify firms as targets and non-targets. The model is to some degree successful, as it assigns takeover probability of 36.3% among actual targets compared to 27.6% among non-targets. However, by investing in predicted targets and replicating the portfolio strategies that Palepu (1986) and Powell (2001) uses, we find insignificant market-adjusted return of 1.8% and 0.9%, respectively. Hence, the results suggest that the takeover prediction model fails to form the basis for successful investment strategies.nhhma