INTERCO Case Finance
Introduction & Financial performance
Interco originally began in 1911 as International Shoe Company and changed to Interco in 1966. It expanded into the consumer goods market mainly through acquisitions. In 1988 too, the company was a major manufacture of furniture, men’s footwear, and apparel, owning many American iconic brands such as Ethan Allen, London Fog, Converse and Florsheim. The firm’s financial goals included:
1. Improve long term sales and earnings growth
2. Improve return of shareholders' equity and
3. Increase returns on corporate assets
Key financial performances (as of February, 1988)
Current Ratio of 3.6 to 1
Debt-to- Capitalization of 19.3%
Cost of capital 10 - 13%
NPV: 3.1 -3.9 billion (Refer: Exhibit A)
Increase Profit in Furniture and Footwear activities: 25.3 Million $ and 40.1 Million $
Decrease Profit in Retail and Apparel activities:
- 1.5 Millions $ and -27 Millions $
The above mentioned financial ratios (current and debt to capital ratio) revealed that in 1988, the combined debt and equity value of Interco was greater than the total assets, resulting into overcapitalization (i.e. the company had too much cash in hand). This fact also explained why the company was buying back its shares. During this time, the company also incurred losses in its Apparel and Retail business segments. All these factors together led Interco to consider company restructuring strategy. At that time City Capital came up with a potential merger proposal with the offer price of $70/stock. This stock price was derived from the company’s current stock price ($59.4/ share) which was undervalued because of the unprofitable activities in its Apparel and Retail business segments. The purpose of this Memo is to evaluate the offer of City Capitals and propose a recommendation to Interco.
Recommendation
As discussed in this Memo, two recommendations could be proposed to Interco.
1. Reject the offer, and stop its Apparel and Retails activities to focus more on profitable
Interco originally began in 1911 as International Shoe Company and changed to Interco in 1966. It expanded into the consumer goods market mainly through acquisitions. In 1988 too, the company was a major manufacture of furniture, men’s footwear, and apparel, owning many American iconic brands such as Ethan Allen, London Fog, Converse and Florsheim. The firm’s financial goals included:
1. Improve long term sales and earnings growth
2. Improve return of shareholders' equity and
3. Increase returns on corporate assets
Key financial performances (as of February, 1988)
Current Ratio of 3.6 to 1
Debt-to- Capitalization of 19.3%
Cost of capital 10 - 13%
NPV: 3.1 -3.9 billion (Refer: Exhibit A)
Increase Profit in Furniture and Footwear activities: 25.3 Million $ and 40.1 Million $
Decrease Profit in Retail and Apparel activities:
- 1.5 Millions $ and -27 Millions $
The above mentioned financial ratios (current and debt to capital ratio) revealed that in 1988, the combined debt and equity value of Interco was greater than the total assets, resulting into overcapitalization (i.e. the company had too much cash in hand). This fact also explained why the company was buying back its shares. During this time, the company also incurred losses in its Apparel and Retail business segments. All these factors together led Interco to consider company restructuring strategy. At that time City Capital came up with a potential merger proposal with the offer price of $70/stock. This stock price was derived from the company’s current stock price ($59.4/ share) which was undervalued because of the unprofitable activities in its Apparel and Retail business segments. The purpose of this Memo is to evaluate the offer of City Capitals and propose a recommendation to Interco.
Recommendation
As discussed in this Memo, two recommendations could be proposed to Interco.
1. Reject the offer, and stop its Apparel and Retails activities to focus more on profitable