BÀI TẬP NHÓM

Thành viên:

Tên MSSV
Trần Cao Kỳ Duyên 030836200026
Phạm Quang Dũng 030836200021
Phạm Văn Hiệu 030836200051
Đinh Thị Tuyết Hoa 030836200053
Nguyễn Khánh Huyền 030836200065

Yêu cầu:

1. Assess Interco’s financial performance. Why is the company a target of a hostile

takeover attempt?

Interco is a successful organization that has some clear weak parts within the organization.
The four business segments within Interco consist of apparel, general retail, footwear, and
furniture. As has been stated in the case and can be seen from Interco’s financial statements,
the footwear and furniture segments have recently been undergoing significant growth,
whereas apparel and general retail have both been struggling and hurting the organization.
Apparel and general retail were struggling largely due to low consumer spending, increased
imports, and an increased emphasis on private-label goods.
Even with these struggling business segments, though, Interco still has been performing
well, making it a good target for a takeover attempt. Overall, Interco’s 1998 sales and net
income increased by 13.4% and 15.4%, respectively, over 1997 levels, return on equity
increase to 11.7% from 9.7%, and the company had a clean capital structure, with a debt-
to-capitalization ratio of 19.3% and a current ratio of 3.6 to 1. Additionally, Interco has
recently been repurchasing company stock, and attempting to enhance shareholder value.
Many times, acquiring firms will like to find a target company that can either thrive as part
of a larger organization, or will be able to function successfully on its own as well. So,
from the perspective of an acquiring firm, Interco would appear to be a firm that the
acquiring company will be able to quickly increase profitability by restructuring and
divesting its underperforming assets. The acquiring firm could help streamline the
organization and focus it solely on its profitable divisions.
Ultimately, in addition to being a target for a takeover, Interco is likely to be the target of
a hostile takeover due to the attitude of management within the organization. The primary
difference between a friendly takeover and a hostile takeover is management’s attitude,
either management will be interested in the takeover and will be willing to work with the
acquiring firm to establish a reasonable and fair price, or if management is not interested
in the takeover, there is likely to be disagreement about a fair value for the firm. In this
situation, Interco’s management has made it clear that they do not want to be taken over;
management feels that the firm can be turned around by restructuring and selling off the
apparel and general retail division. Therefore, in general, management is more likely to
have a higher opinion of the value of the firm than the acquiring firm. This appears to be
the situation with Interco and the current offer from City Capital Associates.

2. Wasserstein, perella and 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 might you have questioned?

Discounted Cash Flow (DCF) analysis for the valuation of Interco can be seen in Appendix
2. In order to determine these calculations, data from Exhibit 12 was used, along with some
additional assumptions. First, the total operating margin was given as a range from 9.2%-
10.1%. To take this range in to account, our calculations began 1989 with a 9.2% operating
margin, and increased by 0.1% every year until reaching the 10.1% in 1998. Additionally,
it assumes that the net income will equal the cash flow for the first five years. Given the
data and these assumptions, the stock price calculations are confirmed, however the
following questions should have been raised:

✓ Why is cash flow assumed to be the same figure as net income for the first five years?
In reality, the actual cash flow would likely be different from the net income.

✓ Where did the growth rates come from? Wasserstein, Perella & Co. estimated growth
rate figures for sales, operating margin, capital expenditures, and working investment,
but the details of how these numbers were calculated are not disclosed. In particular,
the apparel group and retail group show strong sales growth, even though these groups
have actually been struggling recently.

✓ Where did those discount rates come from? Discount rates of 10%, 11%, 12%, and 13%
were used for discounting the cash flows, however the logic behind these particular
rates is not disclosed. These discount rates seem somewhat arbitrary.

✓ Where did the multiples come from? Year 10 cash flow multiples of 14, 15, and 16
were used to determine the terminal value, but the logic behind these particular
multiples is not disclosed.

✓ Why doesn’t the tax rate change in the future? This model assumes a static tax rate of
41%, however given changing income and changing tax laws, this rate would be likely
to change in the future.

✓ Why is there an increase in working investment from 1994 forward? The logic for why
this amount is projected to begin in the year 1994 is not closed.

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