Interco Harvard Case
1389 WordsNov 19, 20126 Pages
Case Interco
Introduction
Interco is a shoe company founded in 1911. Its business has spread to other product through acquisitions. Equity analysts saw Interco as a conservative company that was not highly leveraged leading to high financial flexibility. This allowed the firm to repurchase share and make acquisitions when the opportunities were there. Interco has four major divisions; Apparel Manufacturing, General Retail Merchandising, Footwear Manufacturing and Retailing and Furniture and Home Furnishings. Within these divisions were independent companies. Interco’s goals were long-term sales and growth of earnings, higher return on corporate assets and improved return on equity. To achieve these goals, Interco’s approach was to…show more content… With a valuation of $67,03 per share, City Capital will provide a premium of slightly more than 4%, lower than the 17,9% they were willing to pay as a premium one day prior to stock price based on 27 July 1988 and the more common 30% takeover premium. Scenario 1 included a decrease of 1% in cost of capital which increased the valuation per share even more. The share price increased to $84,30 per share, higher than the takeover bid of $70,00.
Scenario 2, including an increase in cost of capital of 1% let the valuation per share decrease to $55,23. City Capital’s takeover bid would now provide a takeover premium of 26,74% making it more attractive for the board to accept the takeover bid.
But if we than look to the future growth prospective of Interco, we still advise the board to reject the takeover bid. Appendix I shows the prospected valuations per share over the future time period 1988 to 1988. An expected growth rate of 11,6% is incorporated over the 10 years, making the future look very bright.
The price multiples based on each of Interco’s division showed the difference in historical average and City Capital’s proposal. Every division showed greater price multiples than City capital had calculated. Again we advise the board to reject the takeover bid.
Appendix I DCF model prediction over 10 years Interco company | 1988 | 1989 | 1990 | 1991 | 1992 | EBIT | 286995 | 307659 | 329810 | 353556 | 379012 | Tax | 122834 | 131678 | 141159 | 151322 | 162217