A firm becomes a prime candidate for takeover when investors suspect the prospect of a significant diversification discount.

Question

Quizplus · Accepted Answer

A diversification discount occurs when a firm's value is lower due to the presence of multiple businesses or segments. This makes the firm more attractive for takeover as the acquirer can benefit from the potential synergies between different businesses and eliminate the discount. Therefore, a firm with a significant diversification discount is a prime candidate for takeover.

A Firm Becomes a Prime Candidate for Takeover When Investors