Interpret Interco’s financial performance.
Why is Interco the target of a hostile takeover?
What are your interpretations of the Board of Directors in case Exhibit 1?
As a member of Interco’s board are you persuaded by the premiums paid in case Exhibit 10 or the comparable transactions analysis in case Exhibit 11? Why?
Apr. 27 Interco (C) continued:
Compute the estimated value of Interco based on instructions in Exhibit 34. Use the 1988 sales data in Exhibits 8 as the foundation for the sales forecast. And use the terminal multipliers in Exhibit 12 for estimating the value of Interco. See instructions in Exhibit 34, WEB.
Wasserstein, Perella & Co. established a valuation range of $68-$80 per share for Interco. Show that this
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Because of this “undervaluation,” Interco’s management afraid may be a takeover target.
Action taken by Interco
Following 1987 crash, Interco’s board authorized repurchase of 5 million shares (by end of fiscal 1988 over 4 million shares had been repurchased – over 10% of the equity)
7/15/88 Interco announces reorganization plan
–sell the apparel division that is dragging down rest of company
–take the money raised from this sale and return it to shareholders (via special dividend or repurchase)
Raise of new problem
Rales Brothers: they buy undervalued companies with strong brand-names
City Capital (formed by Rales) has Interco in it sights
Thinks currently that the sum of Interco’s parts exceeds Interco’s current stock price
Plans to sell apparel division and also sell part of footwear division, focus on home furnishing
Offer for takeover
City Capital has accumulated 8.7% of Interco’s stock
Ups the ante on 7/27/88: City Capital proposes a merger/takeover of Interco and offers to buy Interco’s stock for $64 per share (price was $44.75 on 6/30/88)
Morning of 8/8/88:Offer raised to $70 per share
Offer is timed well – Interco happens to have a Board meeting scheduled for 8/8/88.
Board wants their financial advisor,
Another option is the issuing of preferred stock, the company’s common stock is already overvalued in the market; therefore, sourcing additional capital through common stock might result to lower proceeds.
3. At what price would you recommend that Rosetta Stone shares be sold?Rosetta Stone: Pricing the 2009 IPO
Exhibit 4 tells us that the stock price of Interco started going up in July from about $44 to $72 on the day of the Board meeting. This tells us that markets anticipated that Inteco is a target for acquisition and increased the stock price of Interco in anticipation of an acquisition premium.
This option involves distributing the $3 billion to shareholders in dividends. The dividend would be issued as a once-off payment in order to prevent an expectation of receiving recurring dividends. Providing $3billion in dividends will result in the share price declining to $48.63 from $61.53 with the earnings per share (EPS) declining to $0.60 (see appendices 1.2 & 4). Despite this however, investors should be indifferent as the amount received as a dividend would negate
As for the combination of cash and new shares, shareholders can take part of their money
3. Compute the unlevered free cash flow and the interest tax shields from 2008 to 2012 based on estimates provided in Exhibit 1 and Exhibit 6. (3 points)
3. Wasserstein, Perella & Co. established a valuation 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 section of Exhibit 12. As a member of Interco’s board, which assumptions would you have questioned? Why?
2. Evaluate the two offers in Exhibit 7. What explains the two structures? In each case, what is the value to MCI shareholders?
These two offers came from 1) a fund consortium led by Robertson Stephens Omega Fund (“RSC”) and Technology Crossover Ventures (“TCV”) and 2) CellTech Communications (“CellTech”), a vendor of wireless technology which had recently gone IPO.
to realize a higher price for its common shares by offering potential investors a “money-back
Refer to Appendix B for the Wasserstein, Perella & Co valuation. As with any discounted cash flow analysis, some of the underlying assumptions made could be questioned. The projected sales growth rates and the terminal growth rate used in the analysis could be considered to be low, as Interco is known to be a growing company. The assumption that sales would only grow 7.2% over the projected timeline was a little conservative, considering that sales growth was 13.4% in 1988, even though retailers were facing a slump at the time. A 14 multiple with a 10% discount rate provides a 2.66% growth rate in
As shown in the financial income statement (Exhibit3), Intel Corp. (INTC) has a capital structure consisting most of equity. Intel has very little debt in its capital structure and the cost of debt would have only a marginal effect on the overall cost of capital. The current capital structure of Intel is not optimal yet since optimal capital structure is making minimum weighted-average cost of capital.
The repurchase program increases the shareholder’s value. This is because of a rise in the price of the shares of the original shareholders.
1. Why might Bollenbach have opened his bidding for ITT at $55 per share? What was his likely strategy?
E. Cindy and Rob estimate that the market value of the common equity in the venture is $900,000 at the end of 2010. The market values of interest-bearing debt are judged to be the same as the recorded book values at the end of 2010. Estimate the market value-based weighted average cost of capital for Castillo Products.