Interco Case Study
Interco’s financial performance was moderately successful for the 1988 fiscal year. Interco’s current ratio (3.6 to 1) and debt-to-capitalization rate (19.3%) indicate that the company is financially flexible. Furthermore, both overall sales and net income increased from the previous year (1987) due largely to the strong performance of Interco’s furniture and footwear divisions. Sales in 1988 increased by 14.7% in the furniture division and 34.2% in the footwear division.
Despite the promising nature of these two divisions, Interco still had to contend with the nagging issue of the underperforming apparel and general retail groups. Due to a number of factors including declining consumer spending and aggressive competition from other retailers, overall performance of both these groups was fairly unexceptional. Profits were down by 3.7% for the retail division.
There were a number of characteristics that made Interco a coveted target for hostile takeover attempts. It was widely recognized by the market that their stock was undervalued. Outside buyers could therefore somewhat easily accumulate a majority of the companies stock and thus gain the associated majority voting rights due to this undervaluation. City Capital, the potential takeover bidder had already accumulated 8.7% of Interco’s stock. Furthermore, Interco had two lucrative industry-leading divisions that would potentially be high appeal spin-offs to outside buyers. These divisions could potentially generate a high profit if broken up and sold off separately.
As board members of Interco the premium paid analysis and comparables transactions analysis have affirmed, our decision that City Capital’s offer is inadequate. The premium paid analysis (Exhibit 10) confirms that the averages are indeed much higher than City Capital’s proposal. Although the comparable transaction analyses for Rales’ Proposal is similar to other benchmarks, a few major concerns about using comparable...
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