INTERCO 1. Assess Interco's financial performance. Why is the company a target of a hostile takeover attempt? Interco had ample financial flexibility. Interco's overall financial health was relatively healthy. It is highly-liquid . The current current ratio ratio was was 3.6 on Februar February y 29, 1988 which mean that it has plenty of cash to cover any of its current liabilities. Moreover, Interco’s capitalized leases was 19.3%. the company was financially “ overcapitalized . ”
When looking at the company collectively, Interco also looks healthy, with sales increasing 4.04% in 1987 and 13.4% in 1988. Growth Growth in earnings earnings moved Interco Interco further toward toward its goal of a 14-15% 14-15% return return on equity: 1988’s ROE of 11.7% was up from 9.7% in fiscal 1987. However, if closer examination is undertaken, it is clear to see that the general retail and apparel businesses are struggling while footwear and furniture have been flourishing. Its apparel business has dropped in operating earnings from $66M in 1986 to $20M in 1988. This represents a -19.70% drop in earnings as a percentage of total Interco earnings from 1987 to 1988. The general retail business has been stagnant. Its earnings slightly increased while its business has not grown much. The apparel manufaturing and general retail divisions remained on-going problems, due largely largely to a change change in the nature nature of these these busine businesse ssess like like declin declinee in consum consumer er spending, imports from countries with lower labor costs. Therefore, since the overall performance of the company was improving, although some divisions were not pulling their weight, this means the stock price might be undervalued. Interco management and Wall Street analysts believed that the apparel group’s performance would continue to weaken weaken Interc Interco’s o’s overal overalll operat operation ionss and cause cause the equity equity market marketss to und underv ervalu aluee its common stock. Interco was a viable target for takeover and restructuring. City capital had already accumulated 8.7% of Interco’s common stock, and on July 27, 1988, it proposed a merger
with Interco. The takeover could result in divesting the general retail and apparel businesses and focusing on its core business of furniture and footwear, which would yield higher profit margins. Based on Interco’s financial structure, Drexel Burnham Lambert believed they could raise enough debt and equity capital to purchase the company.
2. As a member of Interco's board are you persuaded by the premiums paid analysis and the comparable transactions analysis? Why? As a member of Interco’s board, I am not totally persuaded by the premium analysis and the comparable transactions analysis.
As we could see in the Exhibit 10
Premiums paid = (offer price – target price)* 100% Therfore, we can conclude from Wasserstein analysis that the proposal of City Captial is much lower than the intrinsic value of the company. The premium that City Capital offered was much lower than the One day, 4 week high, and 52-week low averages. (Rales Bothers’offer is just 17.9%, 59.1%, 137.3%, 17.2% versus 56%, 80.9%, 171.3%, 15.8%). The price offered by the purchaser is compared to the historical trading prices of the target at various points in time prior to the announcement. Various points in time and averages are used in an effort to address the fact that the share price may have increased as a result of speculative trading or company-specific information that may have impacted the target share price prior to public announcement. The comparable transaction analysis has provided some inaccurate results in Exhibit 11
Value Ranges by Business Segment Business Segment Apparel General retail Footwear Furniture
1988 Sales
Multiple Range
Value Range
Median Value
$ 813.2 532.3 890.4 1,105.6
.4 - .9 .6 - .6 .5 - 2.1 .8 – 2.1
352.28 - 731.88 319.38 - 319.38 445.20 - 1869.84 884.48 – 2321.76
528.58 319.38 1157.52 1603.12
Total Value
3608.6
Business Segment Apparel General retail Footwear Furniture Total value
1988-Operating Income $ 20.2 39.1 92.2 149.1
Business Segment Apparel General retail Footwear Furniture Total value
1988 Operating Cash Flow $ 32.7 48.8 105.3 175.3
Multiple Range
Value Range
Median Value
10.6 - 24 13.1 - 13.1 13.0 - 26.0 11.1 - 20.3
214.12 – 484.8 512.20 – 512.20 1198.6 – 2397.2 1655 – 3026.73
349.46 512.20 1797.9 2340.87 5000.43
Multiple Range
Value Range
Median Value
9.2 - 13.7 9.2 - 9.2 9.2 - 23.9 8.1-15.8
300.84 - 447.99 448.96 - 448.96 968.76 - 2516.67 1419.93-2769.74
374.415 448.96 1742.715 2094.835 4660.925
3. Which assumptions described in the discount cash flow are not proper? 1. The WACC doesn’t have any fundamental to forecast. 2. The Terminal value of the cash flow onward 1999 equal the value of cash flow in 1998 minus the multiple of cash flow. 3. The growth is constant in future, this is uncreditalbe. 4. Capital expenditure is not change year by year.
4. What are your reactions to the roles played in Interco's situation by its board of directors? By Wasserstein, Perella & Co.? The board of directors rejected the proposal of City capital. - City capital did not only undervalue Interco’s stock price, but it could become a poison pill to the shareholder rights.
- The Rale ‘s brothers intended to sell Interco’s apparel businesses and to consider selling parts of footwear and general retailing businesses after completing the acquisition. Therefore, this kind of restruction could affect the shareholders and the board of directors adversely. City capital’s proposal was an unfriendly one for Interco. City capital's offer was inadequate, and therefore constitutes a threat to the Company's stockholders. Restructuring was maybe more reasonable because the restructuring would achieve better value for stockholders. - Furthermore, City capital wanted to buy all of the Interco’s common shares it did not already own, not for only a portion of shares. City capital wanted to buy all the common shares so they could have the absolute strength with the company. Consequenltly, Interco did not want to continue this negotiation. Both board of directors and shareholders seemed to agree to reject this inadequate offer.
Wasserstein, Perella & Co. would try to presuade the board of directors not to accept this offer which did not give Wasserstein, Perella & Co. any benefit. They would persuade the company to not accept the offer because this offer was inadequate and it could hurt not only shareholders but also board of directors. However, because if Interco accepted this offer, Wasserstein, Perella & Co. would have lost much of money in future restructuring’s fee, their advice maybe not objective.
5. In conclusion Interco rejected this offer without any further negotiation. They would try to restructure to give better value for shareholders by selling the apparel bussinesses alone or trying another offer, not this inadequate one.
