INTERCO WrapUp

1
INTERCO Wrap-Up

• Questions to Consider
• What Happened?
• Summary of Key Points

2
The 70 City Capital Offer

• would you accept it?
• yes
• no
• maybe

3
Who are the Key Stakeholders?

• Interco board of directors
• Interco management
• Interco shareholders
• Wasserstein, Perella
• the Rales brothers (City Capital)
• Drexel Burnham
• other...

4
Objectives of the Rales Brothers

• are they raiders (value destroyers)?
• are they value creators?

5
Where will the Rales Get their Money?

• what role does Drexel Burnham play?

6
Does it Matter Who Wins...

• ...to Wasserstein, Perella?

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Who Will Ultimately Decide?

• ...the board of directors!
• board actions poison pill and golden
  parachute
• board composition is it ideal?
• what criteria should you use to decide?

8
What Happened

• some key events from August 8, 1988 to 2000
• think about
• are you surprised?
• what would you have done?

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August 8, 1988

• 70 City Capital offer rejected
• stock closes at 72.50

10
August 22, 1988

• Wasserstein, Perrela adjust valuation range to
  74-87 per share

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September 10, 1988

• City Capital raises offer to 72
• stock closes at 70

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September 19, 1988

• Interco board rejects 72 offer and announces
  development of new restructuring plan

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October 17, 1988

• City Capital raises offer to 74
• stock closes at 71.50

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October 19, 1988

• Interco board rejects 74 offer based on
  Wasserstein-Perrelas 76 estimate of proposed
  City Capital restructuring plan
• stock closes at 70.50

15
November 1, 1988

• Delaware court struck down Intercos shareholder
  rights plan because sole design is to thwart City
  Capital Interco intends to appeal
• stock closes up 4 to 71.75

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November 14, 1988

• Interco shareholders have tendered 93 of
  shares to City Capital, but Interco board still
  refuses to negotiate and approve
• City Capital indicates it will abandon tender
  soon if no progress
• stock falls 2 to 65

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November 16, 1988

• City Capital offer expires
• stock price falls to 63 (from high price of 73
  ? implies 360m lost value)
• class action lawsuit by Interco shareholders
  against Interco board launched

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November 18, 1988

• Interco board announces new restructuring
  recapitalization plan supported by Wasserstein,
  Perrela
• stock closes down 1

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November 1988 Restructuring

• cash dividends of 1.4 billion
• to fund dividend and other costs of
  restructuring, Interco borrowed 1.9 billion
  1.2 billion bridge financing to be repaid over
  18 months based on proceeds from anticipated
  asset sales

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1989

• announced asset sales for numerous divisions
  failed to happen (Sky City, Megastar, Shrader,
  Devon) and many were liquidated Londontown,
  Central Hardware, Ethan Allen fire sale prices
• earnings below forecast for other divisions

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January 10, 1990

• Harvey Saligman, CEO/chair, resigns with huge
  retirement package and replaced by Richard Loynd
  from Converse division

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March 1990

• Wasserstein, Perrela dropped as financial advisor

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March 1990

• Interco settles shareholders lawsuit for 18.5m

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April 1990

• Interco files malpractice suit against
  Wasserstein, Perrela (later settled for 18.3m in
  1992)

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June 15, 1990

• Interco defaults on bond payments

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January 24, 1991

• Interco files for Chapter 11 bankruptcy
  protection

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1992

• Interco emerges from bankruptcy protection
• sells several footwear and other retail units

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1994

• Interco spins off all of Converse Florsheim
• emerges as a furniture-only company

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1995

• former CEO Clifford Davie accused by Interco
  creditors in U.S. bankruptcy court of having
  misappropriated 6m from company

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2000

• Dresdan Bank acquires Wasserstein, Perella for
  1.37 billion

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WHAT DID WE LEARN?Summary of Interco and Finance
Course

• A financial decision involves numerous steps
• Size-up of economy/industry/business
• what are growth implications?
• what are risk implications?
• Identification of financing needs
• cash sources and uses pro forma analysis

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WHAT DID WE LEARN? (continued)

• Measuring and creating value for shareholders
• optimal capital structure ( recapitalization)
• calculation of cost of capital
• use of DCF and other valuation methods
• Sensitivity analysis
• how does valuation change with different
  assumptions?

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THE END!!