Several factors have made Interco an attractive takeover target: 1) Interco’s stock is undervalued due to poor performance in the apparel and general merchandising divisions, which have weakened Interco’s valuation as a whole. 2) As stated by the equity analysts, Interco is an over capitalized company with potential to grow, which makes an acquisition easy to finance. 3) Interco is also a cash generative target for a potential acquirer as it generates approximately $0.10 of operating cash flow for every dollar of sales. 4) The company is also structured in a way that it could be broken up and sold into its constituent parts, which could prove to be worth more than the whole. 2.
As a member of the Board of Interco, neither the Premiums Paid Analysis nor the Comparable Transaction Analysis is very convincing.
Premiums Paid Analysis – At first glance, the premiums paid analysis indicates that the Rales Proposal undervalues the stock relative to other recent transactions. However, this measure has limited reliability in that it is not directly related to the company’s financial outlook. Additionally, this analysis does not indicate which industries are being used as comps, so it is impossible to tell how relevant this data really is.
Comparable Transaction Analysis – Since Interco is a conglomerate, no one industry segment will provide an accurate measure of the effectiveness of the Rales Proposal in the aggregate. Also none of the comps are even close in size to the aggregate valuation range of the Rales Proposal. Therefore, thee comps may not be relevant as smaller companies may have different growth and profitability dynamics. 3.
See Discounted Cash Flow Analysis #1 for a discounted cash flow analysis using Wasserstein’s assumptions, which support their proposed valuation range. As a member of the Board we would question the following assumptions: •
Assumptions related to the apparel division seem higher than warranted: o
The projected growth rate...
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