Mercury Athletic Footwear: Valuing the Opportunity Essay

Team 10 / Mergers and Acquisitions westward Coast Fashions, Inc (WCF) was a large byplay, which dealt with mens and womens apparel. mavin of their divisions was hectogram Athletic footgear. WCF wanted to dispose off this segment. They expert wanted to divest because they wanted to focus more on their core demarcation and move it up to the elite class. John Liedtke was the Business Development place at that time in Active appurtenance Inc. He had a clear idea that acquiring quicksilver will shoot up AGIs revenues for sure. It would also ensure an expansion of the key demarcation. In arrangement to get a clearer picture on the acquisition, he needed to liken and analyze the gilds financials well.By this he could gauge the pros and cons of this acquisition. ar the st sendgic reasons behind the Merger good replete? Explain As a team, we had several(predicate) views on this question. Some reasons make us hypothesise that it may be beneficial for AGI to grab the hazard but more or less make us think that it king non be as promising as it seems. Let us see why we savour it is a good idea for AGI to acquire mercury.Active Gear Inc.hydrargyrum Athletic FootwearRevenue$470,285mn$431,121mn% Revenue Product wise42% Athletic 58% everyday79% Athletic 21% insouciantOperating Income$60.4mn$42,299mnRevenue harvest-time2% to 6%12.5%Active Gear was one of the most successful firms in terms of profitability, in the footgear industry. Mercury looked like a good opportunity for anattractive investment funds because they almost have the like revenues, while being smaller in size, in the grocery store. The Percent revenue in the day-after-day footwear in AGI compensates for the gap in Mercury. Its a perfect sense of equilibrium. When we looked at the industrial average of revenue egress is 10% and AGI is below the standard, however Mercury is above by 2.55%. It is a good sign to move leading for this acquisition, as it will enable AGI to persist at the top in the market. Both companies are in the same industry and have same crossways. Both Mercury and AGI does its manu detailuring in China. AGI sourced its alternatives to the contract manufacturers in China.Mercury stinkpot leverage with these manufacturers as China just experienced a hustle of consolidation favorable for these kinds of manufacturers. This, in turn, can enable AGI to have the opportunity to expand with its top retailers and distributors. Mercurys cost of manufacturing is low and could facilitate to sync the lower profit margins of AGI, which it had been facing from its suppliers, distributors and consumers. (Refer Case summon 5 and 3). Mercury had always been an autonomous body, which harbored its own financials, data management, resource management and distribution. This would pave a smooth way for AGI to take everywhere. This smoothness could not have been expected had Mercury been totally under WCF. today let us look at why some of the members of the team thought that the acquisition is not an appropriate decision There would be st locategic clashes because AGI focuses on Classic and elite products with long life, on the other(a) hand, Mercury focused on flexibility and changed its products establish on expect and trend. (Refer Case study Page 2 and 4).There is a commodious difference in days stock- winning between the two companies. It authority that in that respect must be a strategy of keeping their products on shelf. We also come to know that Liedtke believed that Mercury can adopt the stemma Management of AGI and a bit incremental cost and then it capability reduce the levels of DSI of Mercury. Mercury also concentrated on a different geographic section than AGI. We also think that this Acquisition susceptibility just entail a complete take-over of the Womens melodic phrase of Mercury. However, it efficiency me a loss making business for AGI later (Refer case study Page 6). Review the projections by Liedtke. Are they appropriate? How would you recommend modifying them? We enthrone the indicate 7 for tingeenceAs a team we analyzed individually segments projectionMens AthleticThis segment indicated a 8,72% average growth rate from 2007-2011. According to the information in the case, Mens Athletic revenue grew more 40% over the prior year and the average compound rate from 2004-2006 was of 29%, thereof the forecasted pointedness should be based on this assumption from the case of CAGR of 29%. This projection seems conservative and it can be modified towards the expected 29% growth.Mens CasualWomens AthleticThis segmented shows a growth rate of 2,50% from 2007-2011. According to the information 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 decrease in this percentage not increase as project per Liedtke. Liedtke communicate for this business segment, an average growth rate 7,98% (2007-20 01). The case indicates a growth from 2004-2005 of 13,5% per year . Therefore this can be middling a conservative growth projection. Since this has been solid growth, this could be increased to maintain the 13, 5% sales growth in the upcoming yearsWomens CasualLietdkes projection scoopd that this business line was going to go away by the end of 2007 this is aligned with was its expected from Mercury management accord to the facts stated in the case (page 6). Given this information we can leave off that the Womens Casual as part of Mercury revenue source would disappear, therefore this projection seems reasonable if Mercury does not merge. If merger happens this business line can be enhance by the synergies of both companies and it skill be a positive approach to keep the brand alive.Estimated expectant ExpendituresThis projected expenditure was based on 5, 67% average growth rate from 2007 until 2011. The information in the case indicates that Mercurys expectant spending it s 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 changes in depreciation this seems reasonable for Mercurys operations.Cash Used in OperationsFrom the Historical balance of exhibit 4, in 2006 Cash & Equivalents closed with a balance of $10,676. Liedtke projected a 61% decline for 2007 trim the Cash line item to $4,161. This reduction might be since the historical Balance Sheet (2004-2006) was taking into account Cash & Cash Equivalents where the projected Balance Sheet (2007-2011) its only taking into account Cash used in operations. In addition, it might also be affected by the fact of Mens casual footwear and Womens Casual Footwear revenue are declining and not generating enough sales.Accounts ReceivableThe accounts receivable of Mercury, maintained flat growth with a 6% average growth rate from 2006-2011. Probab ly they have credit terms with retailers and shops, although there is not enough information in the case about this, therefore it seems an appropriate projection.InventoryAccording to Liedtke projections inventory also maintain an average growth of 6% until 2011. An inventory increase its necessary for this type of business, since Mercury of necessity to supply large retailers with their Footwear. In addition, this increase might be reassert with the fact that, Mercury its receiving pressure from suppliers in China who need larger orders to operate at full capacity, therefore Mercury might be forced to make larger orders in the future to maintain its new relationship with the Asian suppliers. However, if Mercury its considering Womens Casual as dead brand this can make the growth to be somewhat conservative.Prepaid ExpensesAccording to Liedtkes projection these expenses increased from$ 10,172 to$14,747 in 2007 equal 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 to their operations however there is not enough information to assume that prepaid expenses can change precipitously over the projected years.Property 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 & early(a) IntangiblesThe amount in trademarks and other intangible should not change since the company 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 model seems reasonable that mercury maintains a conservative growth rate for the future years. The company already has established relationship with retailers and probably their credit terms will remain the same for the upcoming y ears.Accrued 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 make up 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 reduced.Value the target 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. Heilprin 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 take care that there is a significant difference from Heilprins calculations however, it is to reflect upon the seeming different set of the treasury securities that we chose.Here is our DCF, but please refer to the excel file (attached through Turn it In) for all the formulas and comforts we used to give us an idea and to help us distribute 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 Termination 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 method based on case assumption gives spiriteder value than the P/E method. 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 target company has the steady financial statement 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 turn down WACC calculations we drop the Cost of Capital, which can inversely raise the enterprise value. With our high enterprise value we have a higher proposal 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 purify the results are Maintain line of Women casual revenues. AGI has the opportunity to add this line of products. AGI can use the infrastructure 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 d esign of lifestyle for women. The company could consider as minimum an EBIT of $0.5M similar to the 2004. advancement in DSI, DSO, DPO. Mercury has fewer DSI, more DSO, and more DPO. If we analyze the adjacent 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 alter the Working capital in $17M for AP, and $22M for inventory. The total improvement for WC is $39M.Increase passel for their providers. AGI reduced the number of providers to allow them achieve more measure and put AGI in a better negotiating position. In that way, AGI could benefit from the bigger scale and continuing consolidation of their providers. Notice 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. Eliminate the surplus of tidy sum the company have in China. AGI manage their providers in China with 85 employees, and Mercury manages 73 professional. The merged 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).