Interco was founded in 1911 as International shoe company and has expanded into other consumer product and service industries through acquisitions. Currently has 4 major divisions: 1. Apparel 2.

Madina Akhtanova

Interco case study memo

Interco was founded in 1911 as International shoe company and has expanded into other consumer product and service industries through acquisitions. Currently has 4 major divisions: 1. Apparel 2. General retail merchandising 3. Footware 4. Furniture and home furnishings.

However, Interco started to place more emphasis on footware and furniture and home furnishings divisions, because they showed good results. Whereas apparel and retail merchandising become less profitable because of some reasons (cheap imports, drop-off in consumer spending, big discounting programs offered by retailers).

Interco's overall financial position is not so bad. We know from the case that current ratio is 3,6 that shows that they have enough cash to recover current liabilities. Sales and net income increasing 13.4% and 15.4%, respectively, over 1987 levels. This performance was attributable largely to the contributions of the furniture and home furnishings and footwear groups as well as a decrease in Interco’s effective tax rate. Footwear profits increased by $25,3 million, furniture profits increased by $142,6 million and tax rate decreased to 42,8% in comparison with 47,1% in 1987. Growth in earnings moved Interco further toward its goal of a 14-15% return on equity: 1988’s ROE of 11.7% was up from 9.7% in fiscal 1987. However, 2 divisions that are not improving and declining vice versa are struggling and make its negative impact on financial situation of Interco. Retail merchandising profits fell by 3,7% and apparel manufacturing profits decreased by $27,1 million. Thus, as not all divisions show good results and increasing sales and profits it reflects the stock price that can be undervalued. Therefore Interco became attractive to takeover for other companies.

From the Exhibit-11 we can see that Rales proposal multiples are not as good as Interco need in comparison with other industry indicators. When making a decision whether accept or reject the offer these multiples make negative effect because it is better to Interco to realize the higher returns themselves rather that allowing City Capital to make takeover at such low offer.

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