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

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

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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.

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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.

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1987 1988Debt 1,35,019 2,57,327Share Holders Equity 1326215 1251337D+E 14,61,234 15,08,664D-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

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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.

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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.

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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.

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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?

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Exhibit 10 Premiums Paid Analysis1

Average Premium Paid over Stock PriceOne 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.

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Comparable transaction analysisFINDING: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

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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

12/14/1987La-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 10.858/8/1988 Rales Proposal $2,941.30 18.1 2.2 0.9 11.4 9.2

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EXHIBIT 11Footwear 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

6/3/1987Moacq/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

7/31/1986INTERCO/Converse 202.7 37.1 1.8 0.9 24.7 18.2

AVERAGE 29.42 2.572 1.34 20.48 17.368/8/1988 Rales Proposal $2,941.30 18.1 2.2 0.9 11.4 9.2

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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

4/28/1988Wesray/William

Carter $157.40 1.6 0.8 24 13.7

2/2/1988Salant/Manhattan

Indus. 129.7 1.4 0.4 N.M. N.M.

3/17/1986

W Acquisition/Warnc

o 504.7 21 2.5 0.9 10.6 9.2

11/4/1985West 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 9.28/8/1988 Rales Proposal $2,941.30 18.1 2.2 0.9 11.4 9.2

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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

6/24/1988Management

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

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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?

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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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Discounted Cash FlowINTERCO 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

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No. of Shares = 41356847

Value Stock price

TV of 14M 4771704Pv of TV of 14 971728.5923 2082391.095 50.35178564

TV of 15M 5112540PV of TV of 15 1041137.777 2151800.28 52.03008537

TV of 16M 5453376Pv of Tv of 16 1110546.963 2221209.465 53.7083851

Note: For detailed calculation please refer the excel sheet.

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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.

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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.

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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.