lnLerco

llnance ManagemenL






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Indrad| ratama
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8ud|man kusmanto
un|ke usp|ta
MAGIS1Lk CI 8USINLSS ADMINIS1kA1ICN
GADIAn MADA UNIVLkSI1


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Case SLudy of llnanclal ManagemenL

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ASL CVLkVI LW
lnLerco ls a ma[or manufacLurer and reLaller of a wlde varleLy of consumer producLs MosL
of lL's growLh has come Lrough acqulslLlons lL ls organlzed lnLo 4 ma[or operaLlng dlvlslons buL some
of Lhese dlvlslons have creaLed problems Lrough decllne ln sales now one of Lhe company's blggesL
sLockholder ClLy CaplLal (87 accumulaLed) ls Lrylng Lo Lakeover Lhe company 1hls declslon musL be
broughL urgenLly by Lhe board members of lnLerco also as parL of Lhe new resLrucLurlng declslon
1he offer of 70$ per share was analyzed wlLh varlous meLhods uCl comparable LransacLlon
analysls and premlums pald analysls 1hey were broughL LogeLher by Lhe flnanclal advlsor of lnLerco
WassersLeln arella Lo valuaLe Lhe adequacy of Lhe ClLy CaplLal's offer

kL ISSULS
1 ssess lnLerco's flnanclal performance Why ls Lhe company a LargeL of a hosLlle Lakeover
aLLempL?
2 s a member of lnLerco's board are you persuaded by Lhe premlums pald analysls (LxhlblL
10) and Lhe comparables LransacLlons analysls (LxhlblL 11)? Why?
3 s a member of lnLerco's board whlch assumpLlons would you have quesLloned?
4 Pow would you advlse Lhe lnLerco board on Lhe $70 per share offer?
3 Pow would you assess Lhe acLlons of lnLerco's board up Lo ugusL 8 1988? WassersLeln
erella's? 1he 8ale 8roLhers? urexel 8urnham's?

ANALSIS
1 ssess lnLerco's flnanclal performance Why ls Lhe company a LargeL of a hosLlle Lakeover
aLLempL?
lnLerco's overall flnanclal healLh ls relaLlvely healLhy lL ls hlghlyllquld as Lhe currenL raLlos are
conslsLenLly over 33 showlng LhaL lL has plenLy of cash Lo cover any of lLs currenL llablllLles lLs
accounLs recelvable days lndlcaLe LhaL ln 1987 lL Look longer Lo collecL on ouLsLandlng accounLs whlle
Lhls flgure would drop ln 1988 1he same Lrend follows wlLh lLs lnvenLory days lncreaslng ln 1987
and decreaslng ln 1988 whlch would slgnal LhaL lLs Lurnover was slower ln 1987 and fasLer ln 1988
1he accounLs payable days lncreased ln 1987 whlle sllghLly decreaslng ln 1988 1hls ls a healLhy Lrend
as lnLerco was able Lo Lake longer Lo pay off lLs currenL expenses Lhan Lhe pasL
When looklng aL Lhe company collecLlvely lnLerco also looks healLhy wlLh sales lncreaslng 404 ln
1987 and 1339 ln 1988 lLs earnlngs also lncreased 431 ln 1987 and 1397 ln 1988 Powever lf
closer examlnaLlon ls underLaken lL ls clear Lo see LhaL Lhe general reLall and apparel buslnesses are
sLruggllng whlle fooLwear and furnlLure have been flourlshlng lLs apparel buslness has dropped ln
earnlngs from $67M ln 1986 Lo $20M ln 1988 1hls represenLs a 1970 drop ln earnlngs as a

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Case SLudy of llnanclal ManagemenL

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percenLage of LoLal lnLerco earnlngs from 1987 Lo 1988 1he general reLall buslness has been
sLagnanL lLs earnlngs sllghLly lncreased whlle lLs buslness has noL grown much 1herefore slnce Lhe
overall performance of Lhe company ls lmprovlng alLhough some dlvlslons are noL pulllng Lhelr
welghL Lhls means Lhe sLock prlce mlghL be undervalued (due Lo Lhe lnefflclencles) 1hus lnLerco ls a
vlable LargeL for Lakeover and resLrucLurlng 1he Lakeover could resulL ln dlvesLlng Lhe general reLall
and apparel buslnesses and focuslng on lLs core buslness of furnlLure and fooLwear whlch would
yleld hlgher proflL marglns
2 s a member of lnLerco's board are you persuaded by Lhe premlums pald analysls (LxhlblL 10) and
Lhe comparables LransacLlons analysls (LxhlblL 11)? Why?
Looklng aL LxhlblL 10 whlch ls a summary of Lhe average premlums pald Lo acqulre companles ln
1988 we would noL be persuaded by Lhe offer for lnLerco ln parLlcular lf you look aL Lhe premlums
pald by 8ales versus Lhe average premlums pald you can see LhaL Lhey are slgnlflcanLly lower (refer
Lo appendlx )
Looklng aL LxhlblL 11 whlch ls a summary of comparable LransacLlons by buslness segmenL Lhe offer
for lnLerco once agaln falls Lo persuade Looklng aL Lhe average purchase prlce mulLlples of
comparable LransacLlons (refer Lo appendlx 8) lL ls apparenL LhaL Lhe 8ales proposal mulLlples are
lnvarlably lower Lhan Lhe lndusLry averages lL would be ln lnLerco's lnLeresLs Lo dlvesL and reallze
Lhe hlgher earnlngs Lhemselves raLher Lhan allowlng ClLy CaplLal Lo Lake over aL such a low offer
3 s a member of lnLerco's board whlch assumpLlons would you have quesLloned?
8efer Lo ppendlx 8 for Lhe WassersLeln erella Co valuaLlon s wlLh any dlscounLed cash flow
analysls some of Lhe underlylng assumpLlons made could be quesLloned 1he pro[ecLed sales growLh
raLes and Lhe Lermlnal growLh raLe used ln Lhe analysls could be consldered Lo be low as lnLerco ls
known Lo be a growlng company 1he assumpLlon LhaL sales would only grow 72 over Lhe
pro[ecLed Llmellne was a llLLle conservaLlve conslderlng LhaL sales growLh was 134 ln 1988 even
Lhough reLallers were faclng a slump aL Lhe Llme 14 mulLlple wlLh a 10 dlscounL raLe provldes a
266 growLh raLe ln perpeLulLy whllsL aL $70 per share Lhe Lermlnal growLh raLe was
approxlmaLely 477 1hese numbers agaln seem Lo be low for a growLh based company llke
lnLerco 1he senslLlvlLy analysls provlded ln ppendlx 8 shows LhaL changes ln Lhe pro[ecLed growLh
numbers can slgnlflcanLly affecL Lhe value of Lhe company
4 Pow would you advlse Lhe lnLerco board on Lhe $70 per share offer?
Slmllar Lo WassersLeln erella we would also advlse lnLerco noL Lo sell 1he offer of $70 per share ls
an lnsufflclenL amounL and does noL reach Lhe prlce level LhaL ls advanLageous for lnLerco Lo sell
llrsL off lnLerco has leverage when lL comes Lo prlce negoLlaLlon wlLh ClLy CaplLal 1he facL LhaL Lhe
8ales 8roLhers formed ClLy CaplLal wlLh Lhe sole purpose of acqulrlng lnLerco shows Lhey wlll go Lo
greaL lengLhs Lo acqulre lnLerco ln addlLlon ClLy CaplLal has already sLaLed Lhey are noL only wllllng
buL are also capable of lncreaslng Lhelr bld prlce even hlgher Lhan $70 per share lnLerco ls
experlenced wlLh mergers and acqulslLlons and Lhey have Lhe ablllLy Lo demand a hlgher prlce noL

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Case SLudy of llnanclal ManagemenL

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only because of Lhls buL also because as of ugusL 8 1988 Lhe day of Lhe board meeLlng lnLerco
was Lradlng aL $7230 per share
3 Pow would you assess Lhe acLlons of lnLerco's board up Lo ugusL 8 1988? WassersLeln erella's?
1he 8ale 8roLhers? urexel 8urnham's?
lnLerco's board declded Lo re[ecL offers aL $64 and $70 respecLlvely 1he lnLeresL of Lhe board was
Lo lncrease shareholder value and lLs own 1he board would only accepL lf Lhe premlum offers an
upslde LhaL Lhey as a managemenL Leam cannoL creaLe Lhemselves by furLher lmprovlng Lhe
buslness
WassersLeln erella advlsed Lo re[ecL Lhe offer based on several analyses s an advlsor WassersLeln
wlll be pald ln fees LhaL are a percenLage value of Lhe offer 1herefore lL ls ln Lhelr lnLeresL Lo ralse
Lhe offer's value as hlgh as posslble buL wlLhouL [eopardlzlng success probablllLy of Lhe bld
8ales 8roLhers who creaLed ClLy CaplLal solely Lo purchase lnLerco were LargeLlng undervalued
companles Powever Lhey ralsed Lhelr offer from $64 Lo $70 and lndlcaLed Lhelr wllllngness Lo ralse
lL even hlgher 1hey wanLed Lo pay a prlce LhaL ls low enough Lo make Lhem be able Lo exLracL
surplus value by spllLLlng up reselllng or beLLer managlng Lhe company aL a rlsk LhaL ls accepLable Lo
Lhem 1hey belleve LhaL $70 per share allows Lhem Lo do so
urexel 8urnham lndlcaLed LhaL Lhey could ralse equlLy and debL Lo supporL Lhe 8ales 8roLher's offer
urexel as an advlsor Lo 8ales 8roLhers wlll be pald a percenLage of Lhe debL or equlLy ralsed
1herefore Lhey wlll ralse Lhe maxlmum amounL posslble wlLhln an accepLable rlsk
ppendlx
remlums ald analysls
Cne uay 4 weeks 32 week low 32 week hlgh
1988 36 809 1713 138
8ales 179 391 1373 172
ppendlx 8
Comparable 1ransacLlons by 8uslness SegmenL
neL lncome 8ook value Sales CperaLlng lncome CperaLlng Cash llow
verage lurnlLure 2173 233 138 1378 1032
verage looLwear 2942 343 134 2048 1732
verage pparel 2030 173 068 1307 1070
verage Pardware 2200 230 060 1310 920
8ales Pardware 1810 220 090 1140 920

ln our oplnlon Lhe besL valuaLlon meLhod for Lhls case ls acLually Lhe comparables meLhod LhaL Lakes
Lhe prlce mulLlples Lo a benchmark Lo deLermlne lf Lhe sLock ls undervalued Pere many raLlos can
be used and ln our case we declded Lo use Lhe sales mulLlple for each dlvlslon and mulLlply lL by Lhe

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Case SLudy of llnanclal ManagemenL

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sales ln 1988 Laken from Lhe exhlblL 8 Sales are acLually one of Lhe prlmary drlvers of Lhe lnvesLmenL
value

LxhlblL 11( lasL row year 88) x LxhlblL 8 sales for year 1988
09 sales of lurn 1 103 303 993 006 LoLal
09 sales of looL 890 411 801 369
09 sales of ppar 813 198 731 878
09 sales of Pu 332 231 479 023 3 007 278 000

slmllar resulL ls calculaLed lf we use Lhe operaLlng cash flow mulLlple from Lhe exhlblL 11

1hls meLhod ln a slmple pracLlcal and ln our oplnlon Lhe mosL reallsLlc way shows us LhaL Lhe
offered prlce of 26 bllllon ls Loo low We Lhlnk LhaL lnLerco should showcase Lhls slmple calculaLlon
Lo Lhe board members and ask for a beLLer counLeroffer more llkely ln Lhe range of over 80 $ for
Lhe 373 mllllon fully dlluLed shares ouLsLandlng So Lhe offer of 70$ should be refused

Cn Lhe oLher hand we Lhlnk LhaL all 3 meLhods shown by Lhe lnLerco's flnanclal advlsor are blased
because Lhe advlsor has Lhe lncenLlve Lo convlnce Lhe board of Lhe unaLLracLlveness of Lhe offer
because ln case of a buyouL Lhey would lose mllllons of Lhe resLrucLurlng fees LhaL Lhe company
orlglnally have planned for ln Lhls way lnLerco would conLlnue Lhe pracLlce of buylng Lhe
undervalued shares and lmprovlng shareholder's value ssumlng Lhese condlLlons Lhe 8ale's
8roLher's offer mlghL be reasonable one
kLILkLNL
wwwsrlbdcom

1A8LLS





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Case SLudy of llnanclal ManagemenL

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Lxh|b|t 1 Interco Inc I|nanc|a| Statements (000)


8ALANL SnLL1

CurrenL asseLs

1991 1990 1989 1988 1987 1986

Cash

$ 26976 $ 20642 $ 16308 $ 20849 $ 16631 $ 16386

MarkeLable securlLles $ 69383 $ 27687 $ 61317 $ 11033 $ 63747
$
127341

8ecelvables $ 340336 $ 296346 $ 329299
$
486637
$
446733
$
402223

lnvenLorles $ 337334 $ 360473 $ 308901
$
803093
$
733907
$
647116

CLher currenL asseLs $ 37374 $ 132310 $ 289986 $ 33663 $ 23614 $ 22347
1oLal currenL asseLs $ 831643 $ 837860 $ 1203811
$
1339299
$
1286634
$
1213813

roperLy planL and equlpmenL


Land

$ 8743 $ 8728 $ 19103 $ 32323 $ 32266 $ 26770

bulldlngs

$ 193408 $ 192631 $ 321391
$
471787
$
463811
$
437812

Machlnery LqulpmenL $ 227168 $ 223037 $ 237043
$
380402
$
364499
$
320236

ccumulaLed depreclaLlon
$
(239207)
$
(237497)
$
(270669)
$
(403213)
$
(377226)
$
(343018)
neL roperLy planL and equlpmenL $ 172112 $ 186919 $ 327070
$
479499
$
483330
$
441820

CLher asseLs

$ 141807 $ 136431 $ 260333
$
146788
$
133383 $ 99238
1ota| Assets 5 114SS62 5 1161230 5 1793236
5
198SS86
5
192S387
5
17S6893

CurrenL llablllLles


noLes payable $ 931 $ 3444 $ 6017 $ 70317 $ 68840 $

CurrenL porLlon longLerm
debL $ $ 1879217 $ 309961 $ 8172 $ 11913 $ 9647

ayables

$ 110934 $ 197973 $ 220290
$
294634
$
277471
$
239940
1oLal currenL llablllLles $ 111903 $ 2080636 $ 736268
$
373343
$
338226
$
249387


LongLerm debL $ $ 3176 $ 1986837
$
237327
$
133019
$
127409

CaplLal lease obllgaLlons $ $ $ $ 41813 $ 30346 $ 36493

CLher longLerm llablllLles $ 31210 $ 36376 $ 63318 $ 61766 $ 33381 $ 43249

LlablllLles sub[ecL Lo
compromlse $ 2137638 $ $ $ $ $
1oLal longLerm debL $ 2168868 $ 39332 $ 2032133
$
360906
$
240946
$
227133

Shareholders equlLy


referred sLock $ 4472 $ 4493 $ 3231 $ 37113 $ 61793 $ 66027

Common sLock $ 202932 $ 202929 $ 334423
$
199627
$
261889
$
267970

8eLalned earnlngs
$
(1342633)
$
(1166382)
$
(1197687)
$
1179964
$
1099006
$
1027893

1reasury sLock $ $
$
(137136)
$
(183367)
$
(96473)
$
(81739)
1oLal shareholders equlLy
$
(1133211)
$
(938938)
$
(993187)
$
1231337
$
1326213
$
1280133


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Case SLudy of llnanclal ManagemenL

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1ota| ||ab|||t|es p|us owners
equ|ty 5 114SS62 5 1161230 5 1793236
5
198SS86
5
192S387
5
17S6893


INCML S1A1LMLN1

neL sales

$ 1439246 $ 1636079 $ 2011962
$
3370660
$
2979077
$
2868324

CosL of sales

$ 992209 $ 1102372 $ 1338693
$
2284640
$
2000423
$
1932238
SC expenses $ 411133 $ 423246 $ 337797
$
799023
$
712861
$
681886
CLher (lncome) and expense $ (8131)
$
(111282) $ (18943)

lnLeresL expense $ 239493 $ 303123 $ 141733 $ 33333 $ 28082 $ 23323

1oLal Lxpenses $ 1634728 $ 1719639 $ 1999282
$
3117200
$
2741366
$
2639667

Larnlngs before lncome Laxes
$
(213482) $ (63380) $ 12680
$
233460
$
237711
$
228837
lncome Laxes pald (refund) $ (64108) $ (9732) $ 18738
$
108437
$
111937
$
109008
Net Larn|ngs*
5
(1S1374)
5
(S3828) 5 (60S8)
5
14S003
5
12S774
5
119849

ommon stock d|v|dends** 5 5 5 14S6162 5 S7983 5 44867 5 43689


* uoes noL lnclude cerLaln dlsconLlnued operaLlons for 19891991 uoes noL lnclude preferred sLock dlvldends
** uoes noL lnclude Lhe debenLures lssued Lo equlLy shareholders ln 1989