A firm is more likely to be a takeover target:?

Question

A. when the reason for its bad performance is overvalued assets rather than poor managment

b. when the reason for its bad performance is poor managment rather than overvalued assets

c. when it has never had any bad performance

d. when its market value rises far above the underlying value of its assets

e. when its market value and underlying value of its assets are equal

Answer 1

In the reality is not easy to give a quick answer, most of the time a firm it is near to be took over when there is a possibility to get some gains in the short of medium place by acquisitions only. Some companies design financial policies  to stay out of this target but the taker see something that can give it some value...

poor management itself does not mean a takeover target. I would select b.- thinking poor management does not have the ability to apply financial policies oriented to extract the company of that target.

Answer 2

A firm will be a takeover target when an acquiring firm believes it can make a firm more profitable than is reflected in the current price of the firm.  Best answer is B.

A.  Overvalued assets is not clear...might even make price of firm high and make it a less desirable takeover target.

B.  Poor management would mean results would be poor, price of firm would reflect poor performance and an acquiring firm believes it could buy at low price and replace management and increase firm value.  YES

C. If a firm has never had any bad performance, then the price of the firm would reflect this performance and there would be no obvious reason to acquire this firm.   You would get what you pay for.

D.  If a firm's market value rises far above the underlying value of its assets, it would seem that the cost of acquiring the firm would make it a LESS attractive takeover target.

E.  When market value of assets and underlying value of assets are equal...that seems to be arguing market cap and book value are the same.  This really doesn't seem to address whether the firm is a good takeover target.

Answer 3

It can actually be a host of all the choices you gave. I watch some Business series called Dragon's Den which shows a host of investors who will invest in a business. I've heard the different reasons they give for investing in that particular company and I will say that in order of what they invest in a business for, it is:

1) C

2) D

3) E

4) B

5) A

However, on a large-cap corporation field, I would say that businesses usually acquire other companies due to poor management and the belief that they can consolidate the business. It's not easy to give a quick answer to this.  

Answer 4

It is most likely to be taken over if B. If the management is poor an investment company will see an opportunity to put in place it's own management which if they do well, which they will assume they can do, they can turn much higher profits. If the reason for poor profits is overvalued assets that would be a problem expensive to change, and if there already exists good management they would assume they can do no better. When a company has good performance there is no where to go up.

Answer 5

b. when the reason for its bad performance is poor management rather than overvalued assets

It means that better management will increase rate of return thus there is potential for higher profits.

In a, d and e cases there will be no any benefits from taking-over. But "c" means only stability and have no required additional information (relative value of assets).