Copyright
INTERCO HARVARD BUSINESS SCHOOL Case Softwar Softwar 2-296-720 2-296-720 Copyright ©1991 by the President and Fellows of Harvard College. Research Associate Susan L. Rother prepared this case under the supervision of Professor Scott P. as the basis for class discussion rather t han to illustrate either effective or ineffective handling of an administrative situation.
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Copyright
Mason
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Copyright
Mason
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Exhibit 1
Exhibit 1
Board of Directors as of May 16, 1988
Harvey Saligman
Chairman of the Board and CEO of Interco
Harry M. Krogh
President and COO of Interco
Ronald L. Aylward
Vice Chairman of the Board of Interco
R. Stuart Moore
Vice President of Interco; President of The Lane Company, Inc., a subsi
Mark H. Lieberman man
Vice Pres resident of Int Interco rco; Pres resident of Londontow town, a division of Interc
Richard B. Loynd
Vice President of Interco; Chairman of the Board of Converse, Inc., a s
Charl Charles es J. Roth Rothsc schi hild ld,, Jr. Jr.
Vice Vice Pres Presid iden entt of of Int Interc erco; o; Chai Chairma rman n of of the the Boar Board d of of Meg Megas asta tarr App Appar arel el
Zane E. Barnes
Chairman of the Board, President, CEO and director of Southwestern B
Donald E. E. La Lasater
Chairman of of th the Bo Board, CE CEO an and di director of of Me Mercantile Ba Bancorporation,
Lee M. Liberman
Chairman of the Board, President, CEO and director of Laclede Gas Co
Robert H. H. Q Qu uenon
President, CE CEO an and di director of of Pe Peabody Holding Co Compa mpany, In Inc., wh which
Wil William E. Cornelius
Pres resident, CEO and direc rector of Union Electri tric Compa mpany, an electri tric pub
Marilyn S. Lewis
Civic leader and volunteer
Thomas H. O'Leary
Vice Chairman of th the Board and director of Burlington Northern Inc., a h
As of April 15, 1988 all directors, nominees and officers of I nterco, as a group (24 persons) beneficially o
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Exhibit 1
idiary of Interco
bsidiary of Interco roup, a division of Interco ell Corporation, engaged in the general telecommunications business Inc., a bank holding company, and Chairman of the Board and director of Mercantile Bank National mpany, a gas public utility is engaged in coal mining and sales lic utility
olding company with transportation, energy and natural resources concerns ned 1.14% of the outstanding shares of Interco's common stock.
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Exhibit 1
ssociation
Page 5
Exhibit 2
Exhibit 2
Subsidiaries
Abe Schrader Corp. Big Yank Corp. Bowen Shoe Co., Inc. Broyhill Furniture Industries, Inc. Campco Holdings, S.A. Campus Pacific Ltd. Central Hardware Co. Clayton Operations, S.A. College-Town, Inc. Converse Inc. Delmar Sportswear, Inc. Ethan Allen Inc. Factory Outlet Co. Fine's Men's Shops, Inc. Florsheim Inc. Florsheim Shoe Store Co. of Hawaii Florsheim Shoe Store Co.—Midwest Florsheim Shoe Store Co.—Northwest Florsheim Shoe Store Co.—South Florsheim Shoe Store Co.—West
Golde's Department Stores, Inc. Grand Entry Hat Corp. Highland House, Inc. Highland Transport, Inc. Hy-Test, Inc. Interco Subsidiary, Inc. Keith O'brien Investment Co. Lane Co., Inc. Lease Management, Inc. Julius Marlow Holdings, Ltd. L. J. O'neill Shoe Co. ORC Financial Ag Patriot Investment Co. Queen Casuals, Inc. Senack Shoes, Inc. Sky City Stores, Inc. Stuffed Shirt Inc. United Shirt Distributors, Inc. Walton Road Management Co.
Source: Lotus One Source
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Exhibit 3
Exhibit 3
Common Stock Price History (Monthly)
Month End Prices (adjusted for stock splits) 1986
31-Jan-86 28-Feb-86 31-Mar-86 30-Apr-86 30-May-86 30-Jun-86 31-Jul-86 29-Aug-86 30-Sep-86 31-Oct-86 28-Nov-86 31-Dec-86
$35.13 39 39.25 39.625 43.5 47.188 41.375 43.75 40 43.75 44.125 36.875
1987
30-Jan-87 27-Feb-87 31-Mar-87 30-Apr-87 29-May-87 30-Jun-87 31-Jul-87 31-Aug-87 30-Sep-87 30-Oct-87 30-Nov-87 31-Dec-87
39.75 42.625 44.125 39.625 40.125 45.375 51.25 53.25 47.5 36 30 32.25
1988
29-Jan-88 29-Feb-88 31-Mar-88 29-Apr-88 31-May-88 30-Jun-88 29-Jul-88
37.125 42 42 41.125 43.875 44.75 68.5
Source: Interactive Data Corporation
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Exhibit 4
Exhibit 4
Common Stock Price History (Daily)
Daily Closing Prices 2-May-88 3-May-88 4-May-88 5-May-88 6-May-88 9-May-88 10-May-88 11-May-88 12-May-88 13-May-88 16-May-88 17-May-88 18-May-88 19-May-88 20-May-88 23-May-88 24-May-88 25-May-88 26-May-88 27-May-88 30-May-88 31-May-88 1-Jun-88 2-Jun-88 3-Jun-88 6-Jun-88 7-Jun-88 8-Jun-88 9-Jun-88 10-Jun-88 13-Jun-88 14-Jun-88 15-Jun-88 16-Jun-88 17-Jun-88 20-Jun-88 21-Jun-88 22-Jun-88 23-Jun-88 24-Jun-88 27-Jun-88 28-Jun-88 29-Jun-88 30-Jun-88
$40.25 41.5 41 41.625 40.625 40.875 41.75 41.625 42 42.125 42.25 42 41.5 40.625 40.625 40.375 41.5 42.5 42.625 41.25 N.A. 43.875 43.5 42.875 44.125 43.25 42 43.875 43.375 43.375 43.5 43.625 42.5 42.875 43.625 43.25 43.125 43.75 43.625 43.5 43.625 44 44 44.75
1-Jul-88 4-Jul-88 5-Jul-88 6-Jul-88 7-Jul-88 8-Jul-88 11-Jul-88 12-Jul-88 13-Jul-88 14-Jul-88 15-Jul-88 18-Jul-88 19-Jul-88 20-Jul-88 21-Jul-88 22-Jul-88 25-Jul-88 26-Jul-88 27-Jul-88 28-Jul-88 29-Jul-88 1-Aug-88 2-Aug-88 3-Aug-88 4-Aug-88 5-Aug-88 8-Aug-88
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44.625 N.A. 45.375 44.5 44.625 45 45.25 45.375 46.375 49 54.375 54.5 58.375 58.125 57.875 57.25 58 58.875 59.375 67.75 68.5 68.875 67.625 67 67.375 68.25 72.5
Exhibit 4
Source: Interactive Data Corporation
Page 9
Exhibit 6
Exhibit 6
Historical Balance Sheets
INTERCO Consolidated Balance Sheet ($000s except per share data) February 28, Current Assets: Cash Marketable securities Receivable, net Inventories Prepaid expenses and other current assets Total current assets Property, Plant and Equipment: Land Buildings and improvements Machinery and equipment Less accumulated depreciation Net Property, Plant and Equipment Other Assets Total Assets Current Liabilities: Notes payable Current maturities of longterm debt and capital lease obligations Accounts payable and accrued expenses Income taxes Total Current Liabilities Long-term debt, less current maturities Obligations under capital leases, less current maturities Other long-term liabilities Shareholders' Equity: Preferred stock, no par value Common stock, $3.75 stated value Capital surplus (41,356,847 shares issued)
1986
1987
$16,856 127,341 402,225 647,116
$16,631 63,747 446,755 733,907
$20,849 11,033 486,657 805,095
$29,700 57,789 431,743 786,792
22,547
25,614
35,665
25,622
$1,216,085
$1,286,654
$1,359,299
$1,331,646
26,770 437,812 320,256 784,838 343,018 441,820
32,266 465,811 364,499 862,576 377,226 485,350
32,525 471,787 380,402 884,714 405,215 479,499
–
868,670 386,762 481,908
99,238 $1,756,893
153,383 $1,925,387
146,788 $1,985,586
149,170 $1,962,724
--
$68,840
$70,517
$97,297
9,647
11,915
8,172
9,288
184,032 12,699 $249,587
216,365 17,327 $358,226
239,513 4,402 $373,343
278,847 15,294 $400,726
127,409
135,019
257,327
133,403
56,495 43,249
50,546 55,381
41,813 61,766
49,270 56,410
66,027 163,765
61,795 163,643
57,113 155,088
61,285 155,088
104,205
98,246
44,539
49,149
$
Page 10
1988(a)
1987
– –
Exhibit 6
Retained earnings Less 5,173,811 treasury shares Total Shareholders' Equity Total Liabilities and Net Worth
1,027,895 1,361,892 81,739 1,280,153 $1,756,893
Source: Annual report, 10Q's (a) February 29, 1988
Page 11
1,099,006 1,422,690 96,475 1,326,215 $1,925,387
1,179,964 1,436,704 185,367 1,251,337 $1,985,586
1,111,527 1,377,049 54,134 1,322,915 $1,962,724
Exhibit 6
1988
$19,622 16,366 460,759 872,135 44,959 $1,413,841
– – –
890,887 412,332 478,555 146,878 $2,039,273
$146,016
8,900 292,051 5,463 $452,430
255,279 40,032 63,484
36,721 155,088 32,117
Page 12
Exhibit 6
1,194,884 1,418,810 190,762 1,228,048 $2,039,273
Page 13
Exhibit 7
Exhibit 7
Historical Income Statements
INTERCO Consolidated Statement of Earnings ($000s) Year Ended February 28,
First Quarter Ended May 31 1987 1988
1986
1987
1988(a)
$2,832,384 36,140 2,868,524
$2,946,902 32,175 2,979,077
$3,341,423 29,237 3,370,660
$781,421 6,293 787,714
$778,107 6,864 784,971
1,932,258
2,000,423
2,284,640
522,759
522,942
681,886 25,523
712,861 28,082
799,025 33,535
199,145 7,351
201,129 9,179
2,639,667
2,741,366
3,117,200
729,255
733,250
228,857 109,008
237,711 111,937
253,460 108,457
52,276 25,276
51,904 25,762
$119,849
$125,774
$145,003
$26,514
$30,689
Operating income(b)
218,240
233,618
257,758
53,334
54,219
Operating cash flow(c)
267,756
287,133
319,275
-
-
Income: Net sales Other income Costs and Expenses: Cost of sales Selling, general and administrative expenses Interest expense
Earnings before income ta Income taxes Net earnings
Source: Annual report and 10Q (a) For the year ended February 29, 1988 (b) Operating income equal to the sum of earning before income taxes and interest expense less ot (c) Operating cash flow equal to the sum of operating income and depreciation expense
Page 14
Exhibit 7
,
er income
Page 15
Exhibit 8
Exhibit 8
Business Segment Information
Year Ended February 28,
1986
First Quarter Ended May 31 1987 1988
1987
1988
$907,833 461,785 558,286 904,480 $2,832,384
$817,660 498,324 663,521 967,397 $2,946,902
$813,198 532,251 890,411 1,105,563 $3,341,423
$160,339 148,138 209,535 263,409 $781,421
$138,836 149,209 226,672 263,390 $778,107
Apparel General retail Footwear Furniture Total
$66,716 32,085 48,475 105,111 $252,387
$47,269 40,610 52,136 123,766 $263,781
$20,240 39,101 92,204 149,090 $300,635
($670) 14,136 15,777 38,319 $67,562
($247) 12,498 19,700 32,196 $64,147
Other income Corporate expense Earnings before interest and taxes Interest expense
$36,140 (34,147)
$32,175 (30,163)
$29,237 (42,877)
$6,293 (14,228)
$6,864 (9,928)
254,380 (25,523)
265,793 (28,082)
286,995 (33,535)
59,627 (7,351)
61,083 (9,179)
Net Sales to Unaffiliated Customers: Apparel General retail Footwear Furniture Total
Operating Earnings:
Earnings before income taxes
$228,857
$237,711
$253,460
Identifiable Assets at Year End: Apparel General retail Footwear Furniture
Corporate Assets Total
$456,972 234,004 291,292 618,980 $1,601,248
$465,601 248,639 497,706 640,106 $1,852,052
$425,350 252,195 595,861 688,853 $1,962,259
155,645
73,335
23,327
$1,756,893
$1,925,387
$1,985,586
$11,965
$12,123
$12,521
Depreciation Expense: Apparel
Page 16
$52,276
$51,904
Exhibit 8
General retail Footwear Furniture
8,294 8,286 20,971
9,079 10,638 21,675
9,681 13,107 26,208
$13,433 6,169 8,114 27,278
$8,869 8,167 7,486 24,720
$9,220 10,735 9,236 36,188
Capital Expenditures: Apparel General retail Footwear Furniture
Source: 1988 Annual reports and 10Q
Page 17
Exhibit 8
,
Page 18
Exhibit 9
Exhibit 9
Summary of the Takeover Offer
City Capital Associates, L.P. Offer
Date:
8-Aug-88
Price per share:
$70.00
Premium to stock one-day prior(a)
17.90%
Premium to stock one-month prior:
59.10%
Premium to 52-week low:
137.30%
Premium to 52-week high:
17.20%
Value of equity
$2,622.8MM
Net debt
318.5MM
Value of firm
$2,941.3MM
Sales
Value of Firm as a Multiple of: Operating Cash Flow
Operating Income
Value o as a Mu Net Income
Year ending 2/29/88
0.9x
9.2x
11.4x
18.1x
Estimate of year ending 2/28/
0.9
8.8
10.7
17
Source: Adapted with minor modifications in terminology from Wasserstein, Perella & Co., Inc. prese to the Interco Board of Directors, August 8, 1988. Civil Action No. 10111, filed in the Court of Chance of the State of Delaware in and for New Castle County, Exhibit 23. (a) Premiums based on stock prices as of July 27, 1988
Page 19
Exhibit 9
Equity tiple of: Book Value
2.2x 2.2
ntation ry
Page 20
Exhibit 10
Exhibit 10
Premiums Paid Analysis
# Deals(a)
Average Premium Paid over Stock Price One Day 4 Weeks 52-Week Low 52-Week High
1Q 1988
19
62.30%
95.50%
159.50%
16.70%
2Q 1988
9
68.60%
91.30%
182.80%
31.50%
3Q 1988(b)
12
36.50%
49.90%
181.30%
2.60%
1988
40
56.00%
80.90%
171.30%
15.80%
17.90%
59.10%
137.30%
17.20%
Rales
Source: Wasserstein, Perella & Co., Inc. presentation to the Interco Board of Directors, August 8, 19 No. 10111, filed in the Court of Chancery of the State of Delaware in and for New Castle County, Exh (a) Wasserstein, Perella & Co., Inc. selected tender offers (b) Selected tender offers from the months of July and August
Page 21
Exhibit 10
88. Civil Action ibit 23.
Page 22
Exhibit 11
Exhibit 11
Comparable Transaction Analysis
a. Purchase Price Multiples by Business Segment Furniture Manufacturing Companies
Announcement Date Acquiror/Target
Aggregate Price ($MM)(a)
Net Income
Purchase Price Multiple Book Value(b) Sales
12/14/1987
La-Z-Boy/Kincaid
$63.50
22.0x
2.1x
0.8x
11/17/1986
INTERCO/Lane
523.7
19.3
2.8
1.6
8/12/1986
Chicago Pacific/ General Mills Furnitur
89.3
14.1
1.8
1
6/3/1986
Masco/Henredon
260.9
31.6
2.6
2.1
8/8/1988
Rales Proposal
$2,941.30
18.1x
2.2x
0.9x
Source: Wasserstein, Perella & Co., Inc. presentation to the Interco Board of Directors, August 8, 1988. Action No. 10111, filed in the Court of Chancery of the State of Delaware in and for New Castle County, E (a) Sales, operating income, and operating cash flow multiples adjusted for the value of net debt outstan (b) Book value adjusted for intangibles
Footwear Manufacturing Companies
Announcement Date Acquiror/Target
Aggregate Price ($MM)(a)
Net Income
Purchase Price Multiple Book Value(b) Sales
4/25/1988
NIKE/Cole Haan
$95.00
36.2x
N.M.
1.5x
6/3/1987
Moacq/Morse Shoe
312.5
2.5
1.8
0.5
3/10/1987
Reebok/AVIA
191
40.6
6.7
2.1
9/18/1986
Reebok/Rockport
146.1
30.7
N.M.
1.7
Page 23
Exhibit 11
7/31/1986
INTERCO/Converse
202.7
37.1
1.8
0.9
8/8/1988
Rales Proposal
$2,941.30
18.1x
2.2x
0.9x
Source: Wasserstein, Perella & Co., Inc. presentation to the Interco Board of Directors, August 8, 1988. Action No. 10111, filed in the Court of Chancery of the State of Delaware in and for New Castle County, E (a) Sales, operating income, and operating cash flow multiples adjusted for the value of net debt outstan (b) Book value adjusted for intangibles
Exhibit 11 (continued)
Comparable Transaction Analysis
Apparel Companies
Announcement Date Acquiror/Target
Purchase Price Multiple Book Value(b) Sales
Aggregate Price ($MM)(a)
Net Income
$157.40
N.M.
1.6x
0.8x
4/28/1988
esray/William Carte
2/2/1988
alant/Manhattan Indu
129.7
N.M.
1.4
0.4
3/17/1986
Acquisition/Warnc
504.7
21
2.5
0.9
11/4/1985
est Point Pepperall/ Cluett, Peabody
551.9
19.6
1.5
0.6
$2,941.30
18.1x
2.2x
0.9x
8/8/1988
Rales Proposal
Source: Wasserstein, Perella & Co., Inc. presentation to the Interco Board of Directors, August 8, 1988. Action No. 10111, filed in the Court of Chancery of the State of Delaware in and for New Castle County, E (a) Sales, operating income, and operating cash flow multiples adjusted for the value of net debt outstan (b) Book value adjusted for intangibles
Central Hardware Division
Announcement
Aggregate
Page 24
Net
Purchase Price Multiple Book
Exhibit 11
Date
Acquiror/Target
Price ($MM)(a)
Income
Value(b)
Sales
6/24/1988
Management Group/ Payless Cashways
$1,189.40
22.0x
2.3x
0.6x
Rales Proposal
$2,941.30
18.1x
2.2x
0.9x
8/8/1988
Source: Wasserstein, Perella & Co., Inc. presentation to the Interco Board of Directors, August 8, 1988. Action No. 10111, filed in the Court of Chancery of the State of Delaware in and for New Castle County, E (a) Sales, operating income, and operating cash flow multiples adjusted for the value of net debt outstan (b) Book value adjusted for intangibles
Exhibit 11 (continued)
Comparable Transaction Analysis
b. Value Ranges by Business Segment
Business Segment
Apparel General retail Footwear Furniture
Business Segment
Apparel General retail Footwear Furniture
1988 Sales
Multiple Range
Value Range
Median Value
$813.20 532.3 890.4 1,105.60
.4 - .9 .6 - .6 .5 - 2.1 .8 - 2.1
$ 325.3 - $ 731.9 319.4 - 319.4 445.2 - 1,869.8 884.5 - 2,321.8 $1,974.4 - $5,242.9
$569.20 319.4 1,335.60 1,437.30 3,661.50
1988 Operating Income
Multiple Range
Value Range
Median Value
$20.20 39.1 92.2 149.1
10.6 - 24.0 13.1 - 13.1 13.0 - 26.0 11.1 - 20.3
$ 214.1 - $ 484.8 512.2 - 512.2 1,198.6 - 2,397.2 $1,655.0 - $3,026.7 $3,579.9 - $6,420.9
$214.10 512.2 2,268.10 1,766.80 $4,761.20
1988
Page 25
Exhibit 11
Business Segment
Apparel General retail Footwear Furniture
Operating Cash Flow
Multiple Range
Value Range
Median Value
$32.70 48.8 105.3 175.3
9.2 - 13.7 9.2 - 9.2 9.2 - 23.9 8.1 - 15.8
$ 300.8 - $ 448.0 448.9 - 448.9 968.8 - 2,516.7 $1,419.9 - $2,769.7 $3,138.4 - $6,183.3
$300.80 448.9 970.7 1,709.20 $3,429.60
Page 26
Exhibit 11
s(a) Operating Income
Operating Cash Flow
11.7x
8.1x
11.1
9.6
12
9.9
20.3
15.8
11.4x
9.2x
Civil xhibit 23. ing
s(a) Operating Income
Operating Cash Flow
14.1
12.2
13
9.2
24.6
23.3
26
23.9
Page 27
Exhibit 11
24.7
18.2
11.4x
9.2x
Civil xhibit 23. ing
s(a) Operating Income
Operating Cash Flow
24.0x
13.7x
N.M.
N.M.
10.6
9.2
10.6
9.2
11.4x
9.2x
Civil xhibit 23. ing
s(a) Operating
Operating
Page 28
Exhibit 11
Income
Cash Flow
13.1x
9.2x
11.4x
9.2x
Civil xhibit 23. ing
Page 29
Exhibit 12
Exhibit 12
Discounted Cash Flow Analysis
Assumptions
Sales growth(a) Operating margin range(b) Capital expenditures(c) Increase in working investment
Furniture Group Footwear Group Apparel Group
Retail Group
7.70%
6.30%
7.10%
7.60%
13.1%-14.1%
9.1%-10.4%
6.4%-7.0%
6.5%-7.5%
1x
1x
1x
1x
12.50%
12.50%
12.50%
7.50%
Tax rate
Multiple of Cash Flow in Year 10 14.0x 15.0x 16.0x Terminal value ($ millions)
4,746.00
5,085.00
5,424.00
Implied stock price Discount rate 10.00% 11.00% 12.00% 13.00%
$80.00 74 68 63
$84.00 77 72 66
$88.00 81 75 69
Source: Adapted with minor modifications in terminology from Wasserstein, Perella & Co., Inc. presenta Board of Directors, August 8, 1988. Civil Action No. 1011, filed in the Court of Chancery of the State of for New Castle County, Exhibit 23. (a) (b) (c) (d)
Ten-year annual compound growth rate Projected operating margin in 1989 and in 1998 As a multiple of depreciation As a percent of the change in sales in 1994 forward
Page 30
Exhibit 12
Total
7.20% 9.2%-10.1% 1x 11.60% 41.00%
tion to the Interco elaware in and
Page 31
Exhibit 13
Exhibit 13
Reference Range; Retain Core Companies Case ($ millions Except Per Share)
Segment
Furniture Group Footwear Group Total After-tax Divestiture Proceeds Net Corporate Adjustments(a)
Range
$1,525 - $1,750 775 -
900
$2,300 - $2,650 $ 588 - $ 639 (335) -
(273)
Range
$2,553 - $3,016
Per Share Range(b)
$68.00 - $80.00+
Source: Wasserstein, Perella & Co., Inc. presentation to the Interco Board of Directors, August 8, 1988. Civi Action No. 1011, filed in the Court of Chancery of the State of Delaware in and for New Castle County, Exhibi (a) Accounts for net debt, overfunded pension and miscellaneous other assets that include real estate whic (b) Based on 37.5 million fully-diluted shares outstanding
Page 32
Exhibit 13
l Action No. 1011, filed in the Court of Chancery of the State of Delaware in and for New Castle Cou t 23. could be understated
Page 33
Exhibit 13
ty, Exhibit 23.
Page 34
