Interco case study

1. Case Analysis of Interco
Group Members:
 Deepak Gupta
 Jai Kishan
 Megha Dey
 Priyanka Prashad
 SriRam
1

2. Assess Interco's financial performance. Why is the
company target of a hostile takeover attempt?
2

3. 1987 1988
Total Current Assets 1286654 1359299
Total Current Liabilites 358226 373343
C.R 3.591738 3.640885
Current Ratio
• The current ratio measures the company's ability to meet short term obligations.
• The current ratio is closely related to the concept of working capital. Working capital is the difference
between current assets and current liabilities.
• The company has Strong current ratio which indicates they are having high capacity to meet its current
obligation.
3

4. 1987 1988
Total Current Assets 1286654 1359299
Inventory 7,33,907 8,05,095
Total Current Liabilities 358226 373343
Q.R 1.543012 1.484437
Quick Ratio
• It is a fairly stringent measure of liquidity.
• This indicates the relationship between amount of assets that can quickly be turned into cash versus
the amount of current liabilities.
• The company is having high quick ratio so it shows there short term financial position is sound.
4

5. 1987 1988
Debt 1,35,019 2,57,327
Share Holders Equity 1326215 1251337
D+E 14,61,234 15,08,664
D-C Ratio 0.092401 0.170566
Debt-Capital Ratio
The debt-to-capital ratio gives us an idea of a company's financial structure, or how it is financing its
operations, along with some insight into its financial strength.
A Company with low Debt-Capital Ratio is Good
5

6. 1987 1988
Cost Of Sales 2000423 2284640
Average Inventory 690511.5 769096
Inventory-Turnover Ratio
• This ratio measures how fast the stock is moving through the firm and generating sales.
• It indicates whether investment in stock is within proper limit or not.
6

7. 1987 1988
Net Profit 125774 145003
Equity 1326215 1251337
ROE 0.094837 0.115878
ROE
• It indicates how profitable a company is by comparing its net income to its average shareholder
equity.
• It measures how much the share holder earn for their investment in the company.
• Higher the ratio percentage the more efficient is in utilising its equity base and better return to
investors.
7

8. Why Hostile Take Over?
• From the financial performance in comparison with previous year i.e sales &
net income has been increased 13.4% & 15.4% ROE is 11.5% from 9.4%
• So we can say that Interco Was a Successful organisation with some weak
areas because the contribution to profit was majorly from Furniture, Home
Furnishing & Footwear Group .But the Remaining two divisons are not
performing well.
• So Divesting the regions which are in loss will make it a profitable
organization.so this one is a hostile target by city capital.
• It is a hostile takeover because management of interco is not interested in a
takeover because even they know that if they divest their unprofitable
businesses they can turn their business back into profit.
8

9. As a member of Interco's board are you persuaded by
the premiums paid analysis (exhibit 10) and the
comparable transactions analysis (exhibit 11)? why?
9

10. Exhibit 10 Premiums Paid Analysis1
Average Premium Paid over Stock Price
One Day 4 Weeks 52-Week Low 52-Week High
1Q 1988 62.30% 95.50% 159.50% 16.70%
2Q 1988 68.60% 91.30% 182.80% 31.50%
3Q 1988(b) 36.50% 49.90% 181.30% 2.60%
1988 56.00% 80.90% 171.30% 15.80%
Rales 17.90% 59.10% 137.30% 17.20%
1This valuation methodology analyses the premiums over the market prices that have been paid by purchasers to
acquire publicly traded target companies in precedent M&A transactions. 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.
10

11. Comparable transaction analysis
FINDING:
We have computed industry average for various imporatant financial
factors:
• Net income
• Book value
• Sales
• Operating income
• Operating cash flow
• The offer interco is getting from rales that is lower in the most of the following financial factors which are
listed above
11

12. Exhibit 11 Comparable Transaction Analysis
Furniture Manufacturing Companies
Purchase Price Multiples(a)
Announce
ment Aggregate Net Book Operating Operating
Date Acquiror/Target Price ($MM)(a) Income Value(b) Sales Income Cash Flow
12/14/1987
La-Z-
Boy/Kincaid $63.50 22.0x 2.1x 0.8x 11.7x 8.1x
11/17/1986 INTERCO/Lane 523.7 19.3 2.8 1.6 11.1 9.6
8/12/1986 Chicago Pacific/
General Mills
Furniture 89.3 14.1 1.8 1 12 9.9
6/3/1986 Masco/Henredon 260.9 31.6 2.6 2.1 20.3 15.8
8/8/1988 Average 21.75 2.325 1.375 13.775 10.85
8/8/1988 Rales Proposal $2,941.30 18.1 2.2 0.9 11.4 9.212

13. EXHIBIT 11
Footwear Manufacturing Companies
Purchase Price Multiples(a)
Announce
ment Aggregate Net Book Operating Operating
Date Acquiror/Target Price ($MM)(a) Income Value(b) Sales Income Cash Flow
4/25/1988 NIKE/Cole Haan $95.00 36.2x N.M. 1.5x 14.1 12.2
6/3/1987
Moacq/Morse
Shoe 312.5 2.5 1.8 0.5 13 9.2
3/10/1987 Reebok/AVIA 191 40.6 6.7 2.1 24.6 23.3
9/18/1986 Reebok/Rockport 146.1 30.7 N.M. 1.7 26 23.9
7/31/1986
INTERCO/Conv
erse 202.7 37.1 1.8 0.9 24.7 18.2
AVERAGE 29.42 2.572 1.34 20.48 17.36
8/8/1988 Rales Proposal $2,941.30 18.1 2.2 0.9 11.4 9.213

14. Apparel Purchase Price Multiples(a)
Announceme
nt Aggregate Net Book Operating Operating
Date Acquiror/Target Price ($MM)(a) Income Value(b) Sales Income Cash Flow
4/28/1988
Wesray/William
Carter $157.40 1.6 0.8 24 13.7
2/2/1988
Salant/Manhattan
Indus. 129.7 1.4 0.4 N.M. N.M.
3/17/1986
W
Acquisition/Warnco 504.7 21 2.5 0.9 10.6 9.2
11/4/1985
West Point
Pepperall/
Cluett, Peabody 551.9 19.6 1.5 0.6 10.6 9.2
Industries avg 20.3 2 0.75 10.6 9.2
8/8/1988 Rales Proposal $2,941.30 18.1 2.2 0.9 11.4 9.2
14

15. Central Hardware Division
Purchase Price Multiples(a)
Announce
ment Aggregate Net Book Operating Operating
Date Acquiror/Target Price ($MM)(a) Income Value(b) Sales Income Cash Flow
6/24/1988
Management
Group/
Payless
Cashways $1,189.40 22.0 2.3 0.6 13.1 9.2
8/8/1988 Rales Proposal $2,941.30 18.1 2.2 0.9 11.4 9.2
15

16. Wasserstein, Parella and co. established a various range of $68-$80 per common
share for Interco. Show that this valuation range can follow from the assumptions
described in the discounted cash flow analysis (exhibit 12). As a member of
Interco's board, which assumptions would you have questioned? Why?
On what basis they have made terminal Value multiplier ?
Exhibit 12 , Sale Growth is 7.7% for 10 years that is constant.? In Reality There are
many economic factors and fluctuation in company’s performance may happen in
the given period.
 Why Tax Rate doesn't change in the future ? As we have seen in 1987 to 1988
there is huge tax rate change. ( 47.1%- 42.8%), in future this may happen, so we
can not put it as a constant.
Why there is working cap investment from 1994 only?
16

17. 4) How would you advise the Interco's board on the $70 per
share offer?
After Valuing we have got the share prices ranging between $52 to $55, so we
advice this Interco to sell at $70/ share , which is city capital is offering.
The calculation for the value of the firm is mention in the next Slides.
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18. Discounted Cash Flow
INTERCO 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
sales growth in % 7.2 7.2 7.2 7.2 7.2 7.2 7.2 7.2 7.2 7.2
operating margin in % 9.2 9.3 9.4 9.5 9.6 9.7 9.8 9.9 10 10.1
Net sales 3341423 3580835 3837510 4112700 4407747 4724094 5063287 5426985 5816970 6235151 6683579
Earnings from operation 335078 363486 394252 427569 463644 502704 544993 590773 640331 693973
Earnings before tax 335078 363486 394252 427569 463644 502704 544993 590773 640331 693973
less: income tax at 42.8% 143413 155572 168740 182999 198440 215157 233257 252851 274062 297020
net income 191665 207914 225512 244569 265204 287547 311736 337922 366269 396952
less : working capital inv 0 0 0 0 0 42517 45570 48843 52353 56116
FCFF 191665 207914 225512 244569 265204 245030 266166 289079 313916 340836
0.8528785 0.7274017 0.6203852 0.5291132 0.4512693 0.384878 0.328254 0.279961 0.238773 0.203644
pv of FCFF 163466.951 151236.992 139904.313 129404.686 119678.411 94306.614 87370.057 80930.781 74954.513 69409.185
18

19. No. of Shares
= 41356847
Value Stock price
TV of 14M 4771704
Pv of TV
of 14 971728.5923 2082391.095 50.35178564
TV of 15M 5112540
PV of
TV of 15 1041137.777 2151800.28 52.03008537
TV of 16M 5453376
Pv of Tv
of 16 1110546.963 2221209.465 53.7083851
19Note: For detailed calculation please refer the excel sheet.

20. 5) How would you assess the actions of Interco's board up to August 8,
1988? Wasserstein, Parella & Co.'s? The Rales brothers'? Drexel
Burnham's?
• The company wanted to prevent a hostile takeover ,to defend their action they
went for buy back for 4 million shares , so that their in exhibit for we can see that
share price has Increased.
• They might have took a fair value of the company rather than depending
completely on the Financial advisers. As it was a very good offer from city capital.
• Company is thinking to divest the non performing division , which is also
hampering the stock price of the company.
20

21. Wasserstein, Parella & Co.'s
• They have taken many assumptions for which may wrong/ right in the
future , they might have given a suggestion to Interco to get current
offering with the profit.
The Rales brothers'?
This company’s analysis was very good , they are offering a fair price to buy that
company,
Their decision to buy this company was right , because the Interco was doing well except
few division.
21

22. Drexel Burnham's?
• Drexel Burnham was a financial adviser for city capital , and his advice was
regarding funding takeover at a proposal of $70 per share,
• Funding Structure was :
• $1.375 billion by in in the form of Debt or Equity.
• $1.1 billion in the form of credit facility.
• Remaining form bank or other sources.
22