Mercury Athletic Footwear: Valuing the Opportunity Essay

Team 10 / Mergers and AcquisitionsWest Coast Fashions, Inc (WCF) was a too large product business organisation, which dealt with mens and womens apparel. One of their segments was atomic number 80 Athletic footgear. WCF wanted to dispose off this segment. They just wanted to divest because they wanted to focus much on their core business concern and move it up to the elite class. John Liedtke was the Business Development Head at that time in Active tilt Inc. He had a clear idea that acquiring hydrargyrum will shoot up AGIs revenues for sure. It would to a fault ensure an expansion of the key business. In order to get a clearer picture on the acquisition, he needed to compare and analyze the partnerships financials well.By this he could gauge the pros and cons of this acquisition. atomic number 18 the strategic reasons behind the Merger good enough? Explain As a police squad, we had different views on this question. Some reasons make us think that it may be beneficial for A GI to grab the prospect but some make us think that it magnate not be as promising as it seems. Let us see why we feel it is a good idea for AGI to acquire Mercury.Active Gear Inc.Mercury Athletic Footweargross$470,285mn$431,121mn% Revenue Product wise42% Athletic 58% Casual79% Athletic 21% CasualOperating Income$60.4mn$42,299mnRevenue proceeds2% to 6%12.5%Active Gear was one of the most successful firms in terms of profitability, in the footwear industry. Mercury fashioned like a good chance for anattractive investment because they almost have the same revenues, term being smaller in size, in the market. The Percent revenue in the casual footwear in AGI compensates for the gap in Mercury. Its a perfect balance. When we looked at the industrial norm of revenue growth is 10% and AGI is below the standard, however Mercury is above by 2.55%. It is a good sign to move ahead for this acquisition, as it will enable AGI to remain at the top in the market. both(prenominal) compani es are in the same industry and have same products. Both Mercury and AGI does its manufacturing in China. AGI sourced its resources to the contract manufacturers in China.Mercury wad leverage with these manufacturers as China just experienced a wave of consolidation favorable for these kinds of manufacturers. This, in turn, sens enable AGI to have the opportunity to expand with its top retailers and distributors. Mercurys cost of manufacturing is low and could suffice to sync the lower profit margins of AGI, which it had been facing from its suppliers, distributors and consumers. (Refer Case Page 5 and 3). Mercury had always been an autonomous body, which hold its own financials, data copement, resource management and distribution. This would pave a smooth way for AGI to take oer. This smoothness could not have been expected had Mercury been wholly 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 location would be strategic clashes because AGI focuses on Classic and elite products with long life, on the another(prenominal) hand, Mercury focused on flexibility and changed its products ground on guide and trend. (Refer Case study Page 2 and 4).There is a huge difference in days Inventory between the two companies. It means that on that point must be a strategy of keeping their products on shelf. We also come to know that Liedtke believed that Mercury can adopt the Inventory Management of AGI and a bit incremental cost and then it might reduce the levels of DSI of Mercury. Mercury also concentrated on a different geographic section than AGI. We also think that this Acquisition might just entail a complete take-over of the Womens take out of Mercury. However, it might me a loss making business for AGI later on (Refer case study Page 6). Review the projections by Liedtke. Are they appropriate? How would you recommend modifying them? We put the Exhibit 7 for referenceAs a team we analyzed each segments projection handss AthleticThis segment indicated a 8,72% average growth rate from 2007-2011. According to the instruction in the case, Mens Athletic revenue grew more 40% over the prior category and the average compound rate from 2004-2006 was of 29%, therefrom the forecasted item 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 sales 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 communicate per Liedtke. Liedtke projected 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 increased to maintain the 13, 5% sales growth in the upcoming yearsWomens CasualLietdkes projection assumed that this business line was going to disappear by the end of 2007 this is aligned with was its expected from Mercury management according to the facts stated in the case (page 6). Given this information we can conclude that the Womens Casual as part of Mercury revenue generator would disappear, whence 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 might be a positive approach to keep the brand alive.Estimated Capital ExpendituresThis projected expenditure was based on 5, 67% average growth rate from 2007 until 2011. The information in the case indicates that Mercurys capital spending its micro since they focus its resources in market research and product designs.Estimated DepreciationThis item maintains an aver age growth rate of 5,67% for the years of 2007-2011. Because there is no more turn out of changes in depreciation this seems reasonable for Mercurys operations.Cash Used in OperationsFrom the Historical balance of exhibit 4, in 2006 Cash & Equivalents shut with a balance of $10,676. Liedtke projected a 61% decline for 2007 reducing the Cash line item to $4,161. This reduction might be since the historical counterweight Sheet (2004-2006) was taking into account Cash & Cash Equivalents where the projected Balance Sheet (2007-2011) its only taking into account Cash used in operations. In addition, it might also be affected by the fact of Mens casual footwear and Womens Casual Footwear revenue are declining and not generating enough sales.Accounts ReceivableThe accounts receivable of Mercury, maintained flat growth with a 6% average growth rate from 2006-2011. in all probability they have credit terms with retailers and shops, although there is not enough information in the case abo ut this, therefore it seems an appropriate projection.InventoryAccording to Liedtke projections document also maintain an average growth of 6% until 2011. An inventory increase its necessary for this type of business, since Mercury needs to supply large retailers with their Footwear. In addition, this increase might be justified with the fact that, Mercury its receiving pressure from suppliers in China who need larger orders to operate at full capacity, therefore Mercury might be forced to make larger orders in the future to maintain its current relationship with the Asian suppliers. However, if Mercury its considering Womens Casual as dead brand this can make the growth to be somewhat conservative.Prepaid ExpensesAccording to Liedtkes projection these expenses increased from$ 10,172 to$14,747 in 2007 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 operatio ns however there is not enough information to assume that prepaid expenses can change aggressively 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 field of study in the future of Mercury fixed assets.Trademarks &Other 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 years.Accrued ExpensesAccrued expenses which might be related to workers wages, increased from 16,981 to 22,7 78 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 be 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 understand that there is a significant difference from Heilprins calculations however, it is to refl ect upon the probable different look ons of the treasury securities that we chose. here(predicate) is our DCF, but please refer to the excel file (attached through Turn it In) for all the formulas and values we used to give 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 Termination Value from 2011 because the FCF is outgrowth 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 higher 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 Lower 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 included in Lietdkes projections? How would you take them into account? The additional opportunities that the company has to improve 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 concept of lifestyle for women. The company could consider as minimum an EBIT of $0.5M similar to the 2004.Impro vement in DSI, DSO, DPO. Mercury has fewer DSI, more DSO, and more DPO. If we analyze the bordering 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 running(a) 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 mend 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 people the compan y 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).