1. Assess Interco's financial performance. Why is the company a target of a hostile takeover attempt?
Interco's overall financial health is relatively healthy. It is highly-liquid as the current ratios are consistently over 3.5, showing that it has plenty of cash to cover any of its current liabilities. Its accounts receivable days indicate that in 1987 it took longer to collect on outstanding accounts while this figure would drop in 1988. The same trend follows with its inventory days, increasing in 1987 and decreasing in 1988, which would signal that its turnover was slower in 1987 and faster in 1988. The accounts payable days increased in 1987 while slightly decreasing in 1988. This is a healthy trend as Interco was able to take longer to pay off its current expenses than the past.
When looking at the company collectively, Interco also looks healthy, with sales increasing 4.04% in 1987 and 13.39% in 1988. Its earnings also increased 4.51% in 1987 and 13.97% in 1988. 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 earnings from $6.7M in 1986 to $2.0M 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. Therefore, since the overall performance of the company is improving, although some divisions are not pulling their weight, this means the stock price might be undervalued (due to the inefficiencies). Thus, Interco is a viable target for takeover and restructuring. 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.
2. As a member of Interco's board, are you persuaded by the premiums...
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