On August 8, 1988, Interco’s board of directors met to discuss, among other matters, a merger proposal from City Capital Associates Limited Partnership. City Capital had offered $64 per common share of Interco on July 28, 1988, and had raised that offer to $70 per share on the morning of August 8. At this board meeting Interco’s financial advisors, Wasserstein, Perella & Co., established a valuation range of $68-$80 per common share of Interco and presented their evaluation of the offer. Given their valuation, Wasserstein Perella advised the Interco board (see Exhibit 1) that the $70 per share offer was inadequate and not in the best interests of the company and its shareholders. The board of directors voted to reject the City Capital offer.
Founded in December 1911, the International Shoe Company was established as a footwear manufacturing concern and remained so until the early 1960s. In 1966, the company was renamed Interco to reflect the changing character of its business. It had grown, into a major manufacturer and retailer of a wide variety of consumer products and services. Among the most well-known of the brands Interco made were Converse and Florsheim shoes, Ethan Allen furniture, and London Fog rain gear.
Interco’s various operations were substantially autonomous and were supported by a corporate management staff in St. Louis, Missouri. The company’s philosophy had historically been to acquire companies in related fields and to provide their existing management teams with the incentives to expand their businesses while relieving them of such routine support functions as financial and legal requirements. Nearly half of Interco’s growth had come through acquisition. The company continually sought entities that would complement the existing Interco companies. Additional criteria used in screening and selecting acquisition candidates included the presence of highly skilled managers and products that had established leadership positions in their respective markets.
Equity analysts viewed Interco as a conservative company that was financially “overcapitalized.” With a current ratio of 3.6 to 1 and a debt-to-capitalization ratio, including capitalized leases, of 19.3% on February 29, 1988, Interco had ample financial flexibility. This flexibility had allowed the company to repurchase its common shares and make acquisitions as opportunities arose.
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Within these four operating divisions were numerous independent companies as listed in Exhibit 2.
Apparel Manufacturing This group consisted of 11 apparel companies that designed, manufactured, and distributed a full range of branded and private-label sportswear, casual apparel, outer garments, and headwear for men and women. Apparel brands included Le Tigre, Sergio Valente, and Abe Schrader. Distribution was national in scope to department stores, specialty shops, and other retail units, including discount chains.
General Retail Merchandising This group operated 201 retail locations in 15 states. General retailing included large do-it-yourself home improvement centers, general merchandise discount stores, men’s specialty apparel shops, and specialty department stores. Over the prior few years, general retail had been greatly scaled back and was now dominated largely by Central Hardware, a do-it-yourself home improvement chain that emphasized customer service and a broad selection of products.
Footwear Manufacturing and Retailing This division designed, manufactured, and distributed men’s and women’s footwear principally in the United States, Australia, Canada, and Mexico. The group operated 778 retail shoe stores and leased shoe departments in 42 states and in Australia. Interco’s two major footwear operations, Converse Inc. and the Florsheim Shoe Co., commanded leading positions in their respective markets: athletic shoes and men’s traditional footwear. Furniture and Home Furnishings This group manufactured, distributed, and retailed quality wood and upholstered furniture and home furnishings. Furniture brands included Broyhill, Lane, Ethan Allen, and Hickory Chair. In recent years, furniture had expanded through acquisitions and increasing profitability to dominate Interco’s net income. At the end of fiscal year 1988, Interco was the largest furniture manufacturer in the world.
Strategic Repositioning Program
Interco’s goals included long-term sales and earnings growth, increased return on corporate assets, and most important, improved return on shareholders’ equity. To achieve these goals, Interco took a four-pronged approach that included improving the profitability of existing operations and divesting underperforming assets, making acquisitions that had the potential for better than average returns and growth, and employing opportunistic financial strategies such as share repurchases and the prudent use of borrowing capacity.
With these goals established, Interco, in 1984, began a strategic repositioning program aimed at improving overall corporate performance. As part of this initiative, Interco accelerated its efforts to divest underperforming assets and reposition itself in markets offering superior growth opportunities and profitability. The program resulted in a substantial change in Interco’s mix of sales as shown in Table A below. In fiscal 1988 the furniture and footwear groups together accounted for 60% of corporate sales, with apparel and general retail accounting for the rest. This was a reversal of the sales distribution in fiscal 1984.