INTERCO Case Study Memo
UIN:673067895 Section: 8:00 am
Interco is a target of a hostile takeover attempt due to its overall positive financial performances. There is an increase of 4% in total assets on May 31th 1988, above that of corresponding period of 1987. The sales increased by 13.4% and net income by 15.4% in 1987.
Though the apparel and general retail segments decreased in operating earnings. The furniture and home furnishing group earn profit of $149 versus $123.8 million in fiscal 1987 and Footwear group earn profit of $92 versus $52 million, which contribute to the growing net earnings of the company. Besides, Interco is over capitalized, the company might paying too much interests or dividendsIn ...view middle of the document...
1% , much lower than 80.9% the average premium paid, which suggest a higher expectation from the board and a choice of declining the offer. However, we have to be aware that the information provided might not be relative. The premiums in different industries varies, it is too arbitrary to apply the average premium to Interco. Also, it does not measure the market’s reaction to the news of the takeover.
The information is insufficient, thus the data is not useful in assessing the offer.
The comparable Transaction Analysis presents various market multiples enjoyed by competitors of Interco arranged by division, but the information of Interco provided is the overall price and overall net income, which is not comparable. It is better to segment the main four divisions and use the value of each division in the comparison. Also, the ratio of stock price and income is not the same for companies large and small. Companies of the same scale is more useful in such analysis. In sum, the Market Multiple Analysis is not very useful in assessing the decision.
To do a market-multiples valuation of Interco based on the firm’s sale, we use the information of value range provided in Exhibit 11-b.
The estimated Interco stock price per share is
b, The choice of 10% as the rate to discount Interco’s future cash flow is too conservative because the corporate bond rate of the Interco is 9.8%, and apparently Interco should have a discount rate higher than that. 15% might be reasonable if we do the calculation.
c, The discount rate of 15% is more reasonable, because that makes the growth rate close to that in the reality.
6. Based on the information given, it is wise for the company to accept the offer.