International Shoe Company Case

bstract

International Shoe Company, established in 1911, continued to operate in the same segment of the industry until 1966, when the company was renamed as Interco because it had become a major manufacturer of a range of costumer products. The growth strategy of the company was to acquire undervalued businesses and operate them autonomously under the umbrella of Interco. Although overall financial performance of the company remained satisfactory in recent years, apparel and retail businesses had begun to suffer. The company's stock price became undervalued due to inefficiencies of two divisions. The case discusses two alternatives for Interco at this stage, capital restructuring or sale of shares. For this purpose, value of Interco has to be calculated again using Discounted Cash Flow analysis and comparable transactions analysis to find out if the calculations of Wesserstein, Parrella and Co are correct or not.

Assess Interco's financial performance prior to theRales brothers' offer. Why do you think the company was a target of a hostile takeover attempt?

The analysts were right in their opinion that Interco was a very conservative company. Despite being financially successful, the company was overcapitalized. Leverage of the company, including fixed capital leases, was only 19.3% despite continuous expansion through acquisitions.. Firm's financial performance was so great that even after continuous acquisitions and expansions, the company was left with a lot of cash. The current ratio of the company in the beginning of 1988 was 3.6 to 1.

Although, the extent of profitability and growth of four operating divisions of the company was different, overall performance of the company was quite satisfactory. In 1987, revenue of the company grew by 4.04% while in 1988; revenue growth rate was 13.4%. Gradually, the company was coming closer to its profitability target of earning a return on equity more than 14-15%. In fiscal year 1987, return on equity of the company was 9.7% while in 1988; return on equity of the company was 11.7%. However, a closer examination of the financial statement of the company shows that financial success of the company is limited to only footwear and furniture business. On the other hand, general retail and apparel businesses have been struggling and in a way, eating up the profits of footwear and furniture businesses.

Economic events that unfolded in recent years changed the focus and investment priorities of the company. Import of apparel from outside became relatively cheaper during 1987. That is why US apparel manufacturers suffered and lost a lot of sales. On the other hand, retailing industry in US also began to struggle due to a sudden drop in consumer spending owing to stock market crash in year 1987. Competition in the retail market increased as new retail markets sprung up and offered very attractive discounting programs. This led