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Merger Analysis

Nina's Fashions, Inc.

Nina's Fashions, Inc., operates a chain of retail clothing stores in Michigan, Wisconsin, and Illinois. The company has been in business since 1953, and until about 15 years ago, all of its stores were in older, downtown locations. However, in the late 1970s, the chain opened its first suburban store which differed significantly from the older stores. The new store was much larger, stocking many more items than the old stores. Many new stores followed, which were primarily located in shopping malls and shopping centers.

The new stores were a resounding success, and over the past ten years, Nina's has been aggressively selling its older locations and opening suburban stores. The downtown areas in many of Nina's locations have been revitalized and are now filled with high-rise office buildings and upscale retail outlets, so downtown property values have skyrocketed. Thus, the sale of its old store properties resulted in large cash inflows to Nina's. Since the company's strategic plans call for it to lease the new suburban stores rather than to purchase them, the firm now has a "war chest" of excess cash.

Many alternative uses have been discussed for the excess cash, ranging from repurchases of stock or debt to higher dividend payments. However, management has decided to use the cash to make one or more acquisitions, since they believe an expansion would contribute the most to stockholders' wealth. One of the acquisition candidates is Chic, a chain of eleven stores which operates in northern Illinois. The issues now facing the company are (1) how to approach Chic's management and (2) how much to offer for Chic's stock.

Executives at Nina's are good at running retail clothing stores, but they are not finance experts and have no experience with acquisitions. Bob Sharpe, the treasurer, has an accounting background, but he did attend a three-day workshop on mergers at Harvard University last year specifically to...