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Interco was extended a $70 per share offer for the company. However, Wasserstein Perella advised the company to reject the said offer. This case study looks into the factors that Wasserstein Perella has to consider in coming up with his recommendation.
Susan L. Roth
Harvard Business Review (291033-PDF-ENG)
March 12, 1991
Case questions answered:
- Assess Interco's financial performance. Why is the company a target of a hostile takeover attempt?
- As a member of the company's board, are you persuaded by the premiums paid analysis and the comparable transactions analysis? Why?
- Wasserstein, Perella & Co. established a valuation range of $68-$80 per common share for the company. Show that this valuation range can follow from the assumptions described in the discounted cash flow analysis. As a member of the company's board, which assumptions would you have questioned? Why?
- How would you advise the Interco board on the $70 per share offer?
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Interco Case Answers
This case solution includes an Excel file with calculations.
Dear Interco Board of Directors:
We recommend Interco not to take the $70 per share offer. Our analysis shows that the company’s valuation is $3.3 – $3.5billion, and the stock price is between $78 and $86.
Interco’s financial performance
The company’s overall corporate performance was healthy from 1986 to 1988. With a current ratio of 3.6 to 1 and a debt-to-capitalization ratio of 19.3 in 1988, the company had ample financial flexibility to repurchase its common shares and make acquisitions and recapitalize to increase firm value.
The ROE went up from 9.7% in 1987 to 11.7% in 1988. Interco also had a steady growth with overall sales and net income up by 13.4% and 15.4% in 1988 from 1987.
Particularly, sales and operating profits for footwear increased by 34.2% and 77%, respectively. Given the outstanding business performance and potential space to increase firm value, Interco was a promising target of a hostile takeover attempt.
In fact, in July, you were aware that the company’s common stock was under accumulation and suspicious of a third-party acquisition offer.
Premium paid analysis and comparable transactions analysis.
We believe some of the assumptions in the premium analysis and the comparable transactions analysis are ungrounded and can be misleading for the company’s valuation. In the premium analysis, the historical deal performance cannot accurately reflect Interco’s current market value since the industry dynamics…
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