CASE 1 0-7 DEFERRED INTEREST AND INTEREST RATE RESETS Corporations commonly incur debt in financins the acquisition of other companies or in fishtins takeover attacks by competitors. Two stratesies often employed involve deferrins interest payments and incorporatins interest rate resets. For example, INTERCO INC. incurred larse amounts of debt in 1989 to make itself unattractive as a takeover tarset. The debt postponed interest payments until 1991 at which time interest was to be paid at 14%. Interco's stratesy was to sell a portion of its business, ETHAN ALIEN INC , to redeem the debt.

However, the sale netted $120 million less than expected.

WESTERN UNION incurred $500 million in debt that carried with it a reset provision. The provision called for increased interest rates if the bonds were not tradins at a specified price. Western Union's reset provision increased interest rates from 16.5% to 19.25% in 1990.

While interest expense rose, revenues dropped 28% from 1988 to 1989 as a result of fax machines makins Western Union's telex service obsolete.

1. What is the sisnificance of debt with respect to company acquisitions?

2. Why would corporations use deferred interest features and interest rate resets?

3. In the case of Interco, how would incurrins larse amounts of debt be an effective method for fishtins a takeover?