Interco Case Study Solution
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Furniture and home
This division is responsible for the distribution, retailing and home furniture. This division was preparing the acquisition which increased the profitability and became the dominated division in the Interco. It improved the manufacturing ranking of the company and became the highest manufacturing company by the end of year 1988.
Management Interest
Management of Interco was clearly understanding the condition of the industry and was considering the various options to improve the position of the company. The management was examining the performance and stated that the bad performance is reducing the stock prices in the market.
Management was concerned that the undervaluation is the main reason that can lead the low bid for the takeover. Management was planning to takeover different firms but it was considered as the expensive for them.
Rales Brothers’ rivalry
Rales Brothers were known to keep their acquisition focused on the undervalued targets with strong market niches, and for them; Interco was their perfect target. Since, separating the divisions (i.e., apparel and retail merchandising) that were in loss tended to increase Interco’s profits, which is why it had become a hostile target for the Rales Brothers in 1988. Interco remained to be the ultimate objective of Rales Brothers behind the formation of the City Capital. In July 1988 the rale brothers from city capital planned a merger with Interco as the city capital was partner with rale brothers. Rale brothers were famous for different mergers and acquisitions of underrated companies.
The bid offer from city capital was USD64 per share. To-evaluate the bid and the valuation Interco board take the services from other financial advisors and asked the financial advisors to evaluate the offer.
Interco asked the bid again and the bid was increased by USD70 per share.
Share prices
The share value of Interco as being a profitable business was high,but it was also undervalued. Rales Brother-shad established City Capital solely to acquire Interco. Rales brothers raised its offer from $64 to $70 per share in August 1988, which showed its willingness to its offer even further. 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. The share price of the company was not going more than UDS 68. It was the highest share price of the times. And the bid offer from capital was more than this per share price which seemed fair according to the financial advisors.
Per Share Value and DCF
DCF valuation was conducted using the given assumptions in the Table 12, showing a value per share of $1587, which is significantly greater than the offered price of $70. Table 1 shows the DCF Valuation for Interco. The basic purpose of doing this analysis was:
- To evaluate the valuation of the investment on the basis of future cash flows
- It will evaluate the expected value that current investment will give.
- DCF analysis was done to portrait clear picture for the management to make the decision.
- This valuation will help the company management to make the decisions for acquisition.
- It help the management in budgeting....................
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