A large number of mergers and acquisitions took place during the period from 1960 to 1968. In Canada, for example, two out of three industrial companies listed on the Toronto Stock Exchange completed at least one business combination over this period. This study attempts to identify the financial characteristics of the companies that become the object of a takeover. The term ‘‘takeover’’ will be used in its broadest sense: an acquisition of one enterprise by another where the corporate identity of the acquired firm disappears. The above definition makes the distinction between buyer and seller on the basis of the identity of the surviving firm. Consequently, this study considers companies subject to both voluntary and involuntary mergers.
The prominence of takeovers has led to several studies in recent years. Marris’ study of managerial capitalism showed that the companies acquired are those that are undervalued by the market. 2 Similarly, Gort 3 supported a related hypothesis that the level of takeover activity varies with the degree of share undervaluation in the market. This type of analysis relies heavily on a meaningful share price valuation model. More explicitly, the parameters measuring the relationship between the market prices of shares and relevant factors should be reasonably constant. Bomford 4 found that the market will sometimes attach differing weights to those factors. Similarly, Tzoannos and Samuels 5 , in experimenting with a number of valuation models, found that the variables, whether explaining earning yield or dividend yield, were not significant. Thus the type of analysis based only on share valuation might lack external validity.