Inter-co Case Study Solution
Case Overview
Inter-co started its business as a shoe company in 1911, and since then it started spreading its business to different consumer services and products. The company’s debt level was fairly low, and soon it became one of the biggest manufactures of furniture and shoes. The company was focused, and its goal was aimed at improving its long term sales. Inter-co management wanted to increase the company’s earnings on asset returns and equity. The company worked in 4 major divisions, i.e. Shoes / Footwear, Apparel, Furniture / Home Furnishings and Retail Merchandising.
Footwear and furniture divisions were generating more profit, and the other two divisions' performances were not up to mark. Despite of such setback, the company’s overall financial performance was still very healthy. In comparison to the performance of the year 1987; Intercom's sales and net income increased around 13.4% and 15.4% in the year 1988. This indicates that the company had a significant amount of cash to cover any liabilities.
Inter-co management was concerned that the company’s stock price might get undervalued. The management felt that the bad performance in the apparel division was excessively dragging Interco’s stock price downwards.Because of this “undervaluation,” the management was afraid of being a takeover target.
Question 1:
Evaluate the reasons why INTER-CO has a hostile offer than the Rales brothers.
Answer:
Rales brothers were known to keep their acquisition focused on undervalued targets with strong market niches, and for them Inter-co was their perfect target. Since, separating the divisions (i.e., apparel and retail merchandising) that were in loss tended to increase Intercom's profits, which is why it had become a hostile target for the Rales brothers in 1988. Inter-co remained to be the ultimate objective of Rales brothers behind the formation of City Capital.
The share value of Interco as being a profitable business was high,but it was also undervalued. Rales brothers established City Capital solely to acquire Inter-co. Rales brothers raised their offer from $64 to $70 per share in August 1988, which showed their willingness to increase their offer even more. The hostile nature of the offer could be seen in the 8.7% share possession by the City Capital, along with the condition of retrieving the shareholders’ right plan.
Question 2:
Uses the discounted cash flow methodology to estimate the INTERCO's price per share. As a starting point, you can use the projections in the Table 12. However, it is essential to modify the games that do not seem reasonable to you.
Answer:
DCF valuation conducted using the given assumptions in Table 12, shows a value per share of $1587 per share, which is significantly greater than the offered price of $70. Table 1 shows the DCF Valuation for Inter-co.
Question 3:
Assess weatherstripping, Perella & Co. has perverse incentives (i.e. that differ from those of the shareholders) in this transaction
Answer:
After analyzing the valuation of Inter-co; the recommendation by Parella cannot be considered as perverse incentive,because it does not provide any undesirable impact to the Intercom's shareholders. Being a financial advisor; Patella has done a complete analysis of the firm’s value, and the recommendations regarding not considering the bid is also in the high interests of the shareholders.
Question 4:
What is your estimate of the price per share of INTERCO? If you were on the Board of Directors, would you accept the City Capital's offer?
Answer:
The estimated price per share is $1587 per share. The firm is recommended to not pursue the offer of City Capital, as the bid price per share is quite lower than the actual value per share, based on the discounted cash flow valuation. However, the firm is suggested to continue the shareholders’ right plan as investors like Rales brothers can again attempt for an unwanted takeover.................
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