Mercury Athletic Footwear: Valuing the Opportunity Essay

team up 10 / coalitions and AcquisitionsWest Coast Fashions, Inc (WCF) was a large transaction, which dealt with mens and womens app bel. One of their segments was hydrargyrum athletic Footwear. WCF cute to dispose off this segment. They proficient wanted to divest beca engage they wanted to centralise to a greater extent(prenominal) on their core transmission line and gesture it up to the elite class. John Liedtke was the credit line Development Head at that meter in Active appurtenance Inc. He had a clear idea that acquiring mercury will shoot up AGIs grosss for sure. It would in any(prenominal) quality ensure an involution of the key business. In order to set off a cle arr picture on the skill, he needed to comp ar and analyze the beau mondes financials well.By this he could count on the pros and cons of this acquisition. Are the st putgic reasons behind the Merger good enough? Explain As a team, we had different views on this question. just about reasons m ake us think that it may be beneficial for AGI to grab the luck but some make us think that it power not be as promising as it seems. permit us see wherefore we detect it is a good idea for AGI to use up hydrargyrum.Active Gear Inc. hectogram Athletic FootwearRevenue$470,285mn$431,121mn% Revenue harvest wise42% Athletic 58% Casual79% Athletic 21% CasualOperating Income$60.4mn$42,299mnRevenue egress2% to 6%12.5%Active Gear was one of the most successful firms in price of profitability, in the footwear industry. mercury looked like a good chance for anattractive investment because they almost salary back the selfsame(prenominal) revenues, while being littler in size, in the market. The Percent revenue in the casual footwear in AGI compensates for the gap in quicksilver. Its a perfect balance. When we looked at the industrial medium of revenue developing is 10% and AGI is on a lower floor the standard, yet quicksilver is above by 2.55%. It is a good sign to walk out ahead for this acquisition, as it will modify AGI to anticipate at the top in the market. both companies are in the same industry and bind same intersections. Both hectogram and AGI does its manu accompanimenturing in china. AGI sourced its resources to the contract manufacturers in chinaware. mercury rouse leverage with these manufacturers as China just experienced a wave of consolidation favorable for these kinds of manufacturers. This, in turn, can enable AGI to study the prospect to expand with its top retailers and distributors. Mercurys speak to of manufacturing is low and could help to set the lower profit margins of AGI, which it had been facing from its suppliers, distributors and consumers. (Refer scale Page 5 and 3). Mercury had eternally been an autonomous body, which restrained its get financials, education management, resource management and distribution. This would pave a smooth way for AGI to take over. This eloquence could not have been expected had Mercury been positively under WCF. Now let us look at why some of the members of the team thought that the acquisition is not an appropriate decision in that respect would be st putgic clashes because AGI focuses on perfect and elite products with languish life, on the former(a) hand, Mercury focused on flexibility and switch overd its products based on demand and trend. (Refer fount study Page 2 and 4).thither is a huge difference in days Inventory between the ii companies. It means that there must be a st swangy of keeping their products on shelf. We also come to know that Liedtke believed that Mercury can adopt the Inventory focusing of AGI and a bit incremental cost and then it energy reduce the levels of DSI of Mercury. Mercury also concentrated on a different geographic section than AGI. We also think that this Acquisition mightiness just entail a complete take-over of the Womens line of Mercury. However, it might me a acquittance making business for AGI later (Re fer grounds study Page 6). Review the gibbositys by Liedtke. Are they appropriate? How would you recommend modifying them? We stick the Exhibit 7 for referenceAs a team we analyzed for each one segments acoustic projection mens AthleticThis segment indicated a 8,72% second-rate product rate from 2007-2011. gibe to the culture in the case, workforces Athletic revenue grew much 40% over the prior grade and the just compound rate from 2004-2006 was of 29%, therefrom the forecasted item should be based on this self-reliance from the case of CAGR of 29%. This projection seems standpat(prenominal) and it can be transfigure towards the expected 29% offset.Mens CasualWomens AthleticThis section shows a reaping rate of 2,50% from 2007-2011. fit to the teaching provided in the case, the gross revenue of this business line should be declining at 6,25% per year not increasing. therefore its sales should settle in this percentage not emergence as communicate per Lied tke. Liedtke communicate for this business segment, an average growth rate 7,98% (2007-2001). The case indicates a growth from 2004-2005 of 13,5% per year . Therefore this can be somewhat a conservative growth projection. Since this has been solid growth, this could be accessiond to maintain the 13, 5% sales growth in the upcoming ageWomens CasualLietdkes projection assumed that this business line was sacking to disappear by the end of 2007 this is align with was its expected from Mercury management jibe to the facts stated in the case (page 6). presumptuousness this information we can conclude that the Womens Casual as part of Mercury revenue generator would disappear, therefore this projection seems sane if Mercury does not merge. If uniting happens this business line can be enhance by the synergies of both companies and it might be a positive address to keep the brand alive.Estimated Capital ExpendituresThis intercommunicate expenditure was based on 5, 67% average growt h rate from 2007 until 2011. The information in the case indicates that Mercurys capital spending its little since they focus its resources in market research and product designs.Estimated DepreciationThis item maintains an average growth rate of 5,67% for the years of 2007-2011. Because there is no more evidence of diverges in disp educe this seems reasonable for Mercurys operations. specie Used in OperationsFrom the diachronic balance of exhibit 4, in 2006 money & Equivalents closed with a balance of $10,676. Liedtke projected a 61% decline for 2007 reducing the property line item to $4,161. This decline might be since the historical equalizer sheet of paper (2004-2006) was taking into neb Cash & Cash Equivalents where the projected Balance Sheet (2007-2011) its only taking into accountancy Cash used in operations. In addition, it might also be affected by the fact of Mens casual footwear and Womens Casual Footwear revenue are declining and not generating enough sales. Accounts ReceivableThe accounts due of Mercury, maintained flat growth with a 6% average growth rate from 2006-2011. Probably they have credit terms with retailers and shops, although there is not enough information in the case about this, therefore it seems an appropriate projection.Inventory harmonise to Liedtke projections parentage also maintain an average growth of 6% until 2011. An inventory increase its necessary for this type of business, since Mercury postulate to supply large retailers with their Footwear. In addition, this increase might be justified with the fact that, Mercury its receiving pressure from suppliers in China who need large orders to operate at full capacity, therefore Mercury might be forced to make larger orders in the early to maintain its rate of flow relationship with the Asian suppliers. However, if Mercury its find outing Womens Casual as pulseless brand this can make the growth to be somewhat conservative.Prepaid ExpensesAccording to Liedtke s projection these expenses change magnitude from$ 10,172 to$14,747 in 2007 represented 42% increased. After 2007 Liedtkes projected an average growth rate of 6% will maintain an average growth rate. Prepaid expenses might be rent of related to their operations however there is not enough information to assume that prepaid expenses can change obstreperously over the projected years. shoes Plant and EquipmentsThis line item seems to maintain a flat and conservative growth since there is no indications of major changes in this area in the future of Mercury fixed assets.Trademarks &Other IntangiblesThe amount in trademarks and other intangible should not change since the political party already owns the brands of the different segment. If in the future the merger happens then this might decreaseAccounts PayableThis was projected with a 5% average growth rate per year since 2007. For this type of business ensample seems reasonable that mercury maintains a conservative growth rate fo r the future years. The guild already has established relationship with retailers and in all likelihood their credit terms will remain the same for the upcoming years. accrue ExpensesAccrued expenses which might be related to workers wages, increased from 16,981 to 22,778 in 2007 (21% increase). This increase seems somewhat aggressive since the company its probably expects to have less staff from the business lines, which are declining.Deferred TaxesTaxes might not suffer any changes, since this the taxes the company will have to pay for the upcoming years.Pension ObligationProjections of pensions seems reasonable and with no changes for upcomingyears. Nevertheless, if we assume that organizational changes will occur in the future such as lay-offs this line could be cut.Value the tar play company, first by the DCF approach, and second, by multiples, using Liedtkes baseline case. Explain all the assumptions that you make in this processWe look at the valuation done by Joel L. H eilprin for Mercury when the WACC is 11.06% and the long run growth rate is projected at 2.78% However, our DCF uses a WACC of 8.73% and a long-term growth rate of 3%. We do understand that there is a pregnant difference from Heilprins calculations however, it is to reflect upon the probable different measures of the treasury securities that we chose. here(predicate) is our DCF, but please refer to the exceed file (attached through Turn it In) for all the formulas and treasures we used to occur us an idea and to help us reach the solution. In one of our calculations we took termination Value in 2007 based on the M&A. And in the other one, we took the final result Value from 2011 because the FCF is growing slowly. (Please refer to the calculations in the Excel)Do you regard the value you obtained as conservative or aggressive? why?Three calculations give different results because we took assumptions. The DCF order based on case assumption gives high value than the P/E meth od. Based on the calculation we get two different market value of the company. The evident one is $236,988.This approach can be considered as aggressive. Moreover the tooshie company has the steady financial affirmation with a low debt proportion, while the bidder has higher debt in portfolio. We combine the company by Pooling Interest method. This situation considers that the bidder, which tries to target the company with higher price, is considered to be aggressive. From our Lower WACC calculations we spend the Cost of Capital, which can inversely raise the enterprise value. With our high enterprise value we have a higher scheme value to the buyer, higher than Heilprins.What kind of synergies or other sources of value not include in Lietdkes projections? How would you take them into account? The additional opportunities that the company has to amend the results are Maintain line of Women casual revenues. AGI has the opportunity to add this line of products. AGI can use the in frastructure of Mercury without new investments. Additionally, AGI could change the Women casual brand of Mercury to their own brand, so changing the products style to the apprehension of lifestyle for women. The company could consider as minimum an EBIT of $0.5M similar to the 2004.Improvement in DSI, DSO, DPO. Mercury has fewer DSI, more DSO, and more DPO. If we analyze the next table, we can consider that AGI have the opportunity to match the DSI of Mercury with the ones of AGI. Additionally, the company has the opportunity of increase the PDO of Mercury with AGI, negotiating days of payment with the providers in China.These opportunities improve the Working capital in $17M for AP, and $22M for inventory. The total improvement for WC is $39M.Increase volume for their providers. AGI reduced the number of providers to allow them achieve more scale and put AGI in a better negotiating position. In that way, AGI could benefit from the larger scale and continuing consolidation of the ir providers. mention that the Gross margin of Mercury is 44%, while it is 50% for AGI. Therefore, with better negotiations for the Mercury products there is an opportunity for reducing COGS in $25M.Elimination of duplicated costs in China. spend the surplus of people the company have in China. AGI manage their providers in China with 85 employees, and Mercury manages 73 professional. The integrate company can eliminate at least the 73 professionals of Mercury. The value of 73 employees is $1.7M per year (assuming an average monthly payroll and related of $20k per employee).