...John Liedtke, the head of business development for Active Gear, Inc. (AGI), a privately held footwear company, is faced with a potential acquisition opportunity. West Coast Fashions, Inc. (WCF) has decided to strategically reorganize its company, and one of the divisions it intends to shed is Mercury Athletic (MA), its footwear division. Lietdtke knows that acquiring Mercury Athletic would roughly double Active Gear’s revenue, increase its leverage with contract manufacturers, and expand its presence with key retailers and distributors. Before hearing the pitch from Active Gear’s bankers on a possible bid, Mr. Lietdke wants to do his own evaluation of Mercury Athletic first. From a qualitative perspective, MA is an appropriate target for AGI. There are some advantages that AGI should consider for the acquisition of MA. AGI will obtain more product diversification, technology advancement, and a larger distribution channel. That being said, Mr. Liedtke needs to figure out an estimated valuation for an expected bid offer. The valuation techniques that can be used for the acquisition of MA is the discounted cash flow (DCF) method while also looking at comparable metric ratios across the industry. Some comparable metrics that Lietdke could analyze for MA to compare across the industry are P/E, EV/EBIT, and EV/EBITDA. Lietdke should also be aware of potential problems associated with the DCF strategy. The problems outlined in chapter 9 include, the typical investment opportunity has...
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...endangered Active Gear s growth. Mercury Athletic Footwear designs and distributes athletic and casual footwear dominantly to the youth market. Mercury competes in four main product lines: men s and women s athletic and casual footwear. Men s athletic footwear is the leading product for Mercury Athletic. Women s casual footwear is Mercury s worst performing product and post-acquisition the line may be discontinued by Active Gear. The acquisition of the Mercury Athletic division has sources of potential including an increase in Active Gear s revenue, an increase in leverage with contract manufacturers, boosting capacity utilization and expanding its presence with retailers and distributors. Upon the review of the opportunity to acquire Mercury Athletic Footwear, the results of the financial analysis below indicate Active Gear should proceed with the acquisition. Based on the Free Cash Flow Method, considering the financial projections and assumptions for Mercury Athletic, indicate the acquisition has a positive net present value of $112,778,000 [Present Value of Future Cash Flows (59,440,000) + Terminal Value ($276,921,000) Purchase Price ($223,583,000)]. There are also possible synergies that could make the project even more financially favorable, which are discussed below in the analysis. Introduction John Liedtke, the head of business development for Active Gear, Inc. is responsible for developing the financial projection for the acquisition of Mercury Athletic. Below is a summarized...
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...Active Gear’s growth. Mercury Athletic Footwear designs and distributes athletic and casual footwear dominantly to the youth market. Mercury competes in four main product lines: men’s and women’s athletic and casual footwear. Men’s athletic footwear is the leading product for Mercury Athletic. Women’s casual footwear is Mercury’s worst performing product and post-acquisition the line may be discontinued by Active Gear. The acquisition of the Mercury Athletic division has sources of potential including an increase in Active Gear’s revenue, an increase in leverage with contract manufacturers, boosting capacity utilization and expanding its presence with retailers and distributors. Upon the review of the opportunity to acquire Mercury Athletic Footwear, the results of the financial analysis below indicate Active Gear should proceed with the acquisition. Based on the Free Cash Flow Method, considering the financial projections and assumptions for Mercury Athletic, indicate the acquisition has a positive net present value of $112,778,000 [Present Value of Future Cash Flows (59,440,000) + Terminal Value ($276,921,000) – Purchase Price ($223,583,000)]. There are also possible synergies that could make the project even more financially favorable, which are discussed below in the analysis. Introduction John Liedtke, the head of business development for Active Gear, Inc. is responsible for developing the financial projection for the acquisition of Mercury Athletic. Below is a summarized...
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...2009 TIMOTHY A. LUEHRMAN JOEL L. HEILPRIN Mercury Athletic Footwear: Valuing the Opportunity In March 2007, John Liedtke, the head of business development for Active Gear, Inc., a privately held footwear company, was contemplating an acquisition opportunity. West Coast Fashions, Inc. (WCF), a large designer and marketer of men’s and women’s branded apparel had recently announced plans for a strategic reorganization. The plan called for a divestiture of certain non-core assets and a renewed focus on WCF’s higher-end business, business-casual, and formal-wear apparel businesses. One of the divisions WCF intended to shed was Mercury Athletic, its footwear division. Liedtke knew that acquiring Mercury would roughly double Active Gear’s revenue, increase its leverage with contract manufacturers, and expand its presence with key retailers and distributors. He also expected that Active Gear’s bankers would quickly approach the company about a possible bid for Mercury; consequently, he wanted to complete his own rough evaluation of the opportunity before hearing the bankers’ pitch. Athletic and Casual Footwear Industry Footwear was a mature, highly competitive industry marked by low growth, but fairly stable profit margins. Despite the industry’s overall stability, the performance of individual firms could be quite volatile as they vied with one another to anticipate and exploit fashion trends. The market for athletic and casual shoes remained fragmented, despite...
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...Mercury Athletic Footwear: Valuing the Opportunity Merger and Acquisition Assignment * Is mercury an appropriate target for AGI? Why or Why not? The footwear industry is highly competitive industry with fairly stable profit margins. In this industry, players compete on basis of style, price and quality. Success factors are active management of inventory and production. Active Gear is a profitable firm in the industry; however Active Gear is a smaller firm than many other competitors and its small size is becoming a competitive disadvantage. The rise of large retailers has also endangered Active Gear’s growth. Mercury Athletic Footwear designs and distributes athletic and casual footwear dominantly to the youth market. Mercury competes in four main product lines: men’s and women’s athletic and casual footwear. Men’s athletic footwear is the leading product for Mercury Athletic. Women’s casual footwear is Mercury’s worst performing product and post-acquisition the line may be discontinued by Active Gear. The below table lists some financial and other aspects of both firms: | Active Gear Inc | Mercury Athletic | Financial Aspect: | Revenues | $470,286 M | $431,121 m | % of Revenue Product | 42% Athletic58% Casual | 79% Athletic21% Casual | Operating Income | $60.4 m | $42,299 m | Revenue Growth | $2-6% | 12.5% | DSI (Days Sales Inventory) | 42.5 | 62.2-10 days more than industry | Other Aspects: | Demographical Target | Family members | Youth...
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...1. Do you think Mercury is an appropriate target for AGI? Why or why not? Mercury is an appropriate target for AGI. AGI is looking to increase its revenue and profit by utilizing synergies. The initial aim of AGI for acquiring Mercury Athletics is to increase leverage with contract manufacturers and to boost the cooperation with the retailers and distributors. AGI was one of the most profitable and successful companies in the market segment, but the firm’s size remained rather small in comparison with the main competitors. Therefore, with the acquisition of Mercury, AGI planned to build competitive advantage. Besides, the target company had well developed operation infrastructure, impressive labor facilities in China and numerous possibilities in reaching the markets in Asia. 2. Review Liedtke’s projections stated in the case. Are they reasonable? How would you recommend modifying them? [Hint: Calculate ratios and margins for the projections and compare these to the historical relationships.] Mercury’s EBIT margin for 2006 was 9.8%. Liendke’s 2007 projected EBIT reflects a conservative increase in EBIT of 9% compared to the average industry growth rate of 10%. According to the forecast for 2007 to 2011, the company is forecasted to show gradual and stable growth of consolidated income from $479.3 million to $597.7 million. This growth rate was estimated by assuming that men’s athletic department sales will be declining from 15% in 2007 to 5% in 2011. Similar...
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...Mercury Athletic Footwear: Valuing the Opportunity Team 10 / Mergers and Acquisitions West Coast Fashions, Inc (WCF) was a large business, which dealt with men’s and women’s apparel. One of their segments was Mercury Athletic Footwear. WCF wanted to dispose off this segment. They just wanted to divest because they wanted to focus more on their core business and move it up to the elite class. John Liedtke was the Business Development Head at that time in Active Gear Inc. He had a clear idea that acquiring Mercury will shoot up AGI’s revenues for sure. It would also ensure an expansion of the key business. In order to get a clearer picture on the acquisition, he needed to compare and analyze the company’s financials well. By this he could gauge the pros and cons of this acquisition. Are the strategic reasons behind the Merger good enough? Explain As a team, we had different views on this question. Some reasons make us think that it may be beneficial for AGI to grab the opportunity but some make us think that it might 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 Footwear | |Revenue |$470,285mn |$431,121mn | |% Revenue Product wise |42% Athletic 58% Casual ...
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...1. Do you think Mercury is an appropriate target for AGI? Why or why not? Mercury is an appropriate target for AGI. AGI is looking to increase its revenue and profit by utilizing synergies. The initial aim of AGI for acquiring Mercury Athletics is to increase leverage with contract manufacturers and to boost the cooperation with the retailers and distributors. AGI was one of the most profitable and successful companies in the market segment, but the firm’s size re mained rather small in comparison with the main competitors. Therefore, with the acquisition of Mercury, AGI planned to build competitive advantage. Besides, the target company had well developed operation infrastructure, impressive labor facilities in China and numerous possibilities in reaching the markets in Asia. 2. Review Liedtke’s projections stated in the case. Are they reasonable? How would you rec ommend modifying them? [Hint: Calculate ratios and margins for the projections and compare these to the historical relationships.] Mercury’s EBIT margin for 2006 was 9.8%. Liendke’s 2007 projected EBIT reflects a conser vative increase in EBIT of 9% compared to the average industry growth rate of 10%. According to the forecast for 2007 to 2011, the company is forecasted to show gradual and stable growth of consolidated income from $479.3 million to $597.7 million. This growth rate was estimated by assuming that men’s athletic department sales will be declining from 15% in 2007 to 5% in 2011. Similar trends...
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...was Mercury Athletic Footwear. WCF wanted to dispose off this segment. They just wanted to divest because they wanted to focus more on their core business and move it up to the elite class. John Liedtke was the Business Development Head at that time in Active Gear Inc. He had a clear idea that acquiring Mercury will shoot up AGI’s revenues for sure. It would also ensure an expansion of the key business. In order to get a clearer picture on the acquisition, he needed to compare and analyze the company’s financials well. By this he could gauge the pros and cons of this acquisition. Are the strategic reasons behind the Merger good enough? Explain As a team, we had different views on this question. Some reasons make us think that it may be beneficial for AGI to grab the opportunity but some make us think that it might 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 Footwear Revenue $470,285mn $431,121mn % Revenue Product wise 42% Athletic 58% Casual 79% Athletic 21% Casual Operating Income $60.4mn $42,299mn Revenue growth 2% to 6% 12.5% Active Gear was one of the most successful firms in terms of profitability, in the footwear industry. Mercury looked like a good opportunity for an attractive investment because they almost have the same revenues, while being smaller in size, in the market. The Percent revenue in the casual footwear in AGI compensates for the gap in Mercury. It’s...
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...------------------------------------------------- ------------------------------------------------- Mercury Athletic Footwear: Valuing the Opportunity By Christian Daba Submitted To John Katkish Background West Coast Fashions, Inc has decided to sell one of their segments, Mercury Athletic in the context of a broader reorganization. The head of the business development for Active Gear, Inc(AGI), John Liedtke, views this event as a good opportunity to acquire Mercury Athletic. Acquiring Mercury, to a large extent, is driven by that Mercury would double Active Gear’s revenue, increase its leverage with contract manufacturers, and expand its presence with key retailers and distributors. More importantly, this is due to some inferior performance AGI is going through, mainly the small size does not put AGI in a dominating negotiating position with its contract manufacturers. Meantime, some possible synergies make Mercury Athletic a very appropriate target. However, John Liedtke has not completed his evaluation of this opportunity by using various methods. Qualitative valuation Firstly, there are some facts should be considered: 1. AGI and Mercury are in the same industry—footwear, and both have casual and athletic segments, and are located in North America. 2. Their brand images and target consumers are quite similar. AGI brand and logo are associated with a lifestyle hat was prosperous, active and fashion-conscious. Likewise, Mercury monitored styles and image that are from a global youth culture...
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...Active Gear, Inc. Active Gear, Inc. is an athletic shoe company, which, at the time of the case focuses on casual and recreational footwear aimed at a core demographic of suburban family members aged 25-45. The shoes are generally considered to be fashionable and functional. The casual line of shoes is sold in general retail stores, department, and specialty stores via wholesalers and independent distributors. The athletic line is made through independent sales representatives to a small number of sporting goods stores, pro shops, and specialty athletic stores. AGI has in part maintained their perceived high quality brand image by abstaining from selling through discount retailers. Although they feel this decision has preserved operating margins, they believe it has hurt sales growth. By focusing on a smaller portfolio, Active gear has been able to maintain relatively simple and efficient production an supply chains. This has led to a competitive advantage by way of avoiding poor industry cycles, write-downs, and missed profit opportunities. AGI’s days in inventory is 42.5, much lower than the industry average of 50.9. Despite the fact that AGI is among the most profitable firms in the industry, AGI has started to believe their smaller than industry average size is resulting in a competitive disadvantage. Mercury Athletic Mercury is a smaller shoe company with a highly niche market. The demographic for the company is 15 to 25 year olds with an interest in extreme sports...
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...TO: Lecturer FROM: Student RE: Mercury Athletic Footwear Acquisition Net Present Value of Mercury Athletic Enterprise The results of my financial analysis based on the Free Cash Flow Method considering the base case of financial projections and assumptions for Mercury Athletic Footwear collated and developed by John Liedtke indicate that that the project to acquire Mercury Althletic has a positive net present value at $243,025 (in thousands) [ given by PV(FCF)=86,681+ PV (Terminal Value) =156,343] which is also greater than the recommended acquisition price of $186,216 (in thousands),therefore Active Gear Inc. should proceed with the acquisition of Mercury’s operation. Free Cash Flow The free cash flow from Mercury’s business operations was determined using the base case for the consolidated operating income, expenses, tax rate and depreciation to determine the net operating profits after tax (NOPAT) for the years 2007-2011. Free cash flow was then calculated using the formula (FCF= NOPAT + Depreciation-∆ Net Working Capital -∆Fixed Assets) which was evaluated at $21,240, $26,727, $ 22,097, $25,473 and $29,545 for the years 2007, 2008, 2009, 2010 and 2011 respectively. The Cost of Debt and the Cost of Equity The next step was to determine the coast of debt, using the assumptions made by Mr. Liedtke which outlines a tax rate of 40%, the cost of debt of 6% for a leverage of 20% debt. The after-tax cost of debt (RD) was determined to be 3.6% [using RD =(R*(1-Tax...
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...MERCURY ATHLETIC FOOTWEAR Problem statement: West Coast Fashions, Inc a large business of men’s and women’s apparel decided to dispose of one of their segments; Mercury Athletic. John Liedtke, head of the business development for Active Gear, Inc saw it has a possible opportunity for them to acquire it. The footwear industry is very competitive, with low growth and stable profit margins. AGI is very profitable but it is smaller than its competitors, which is becoming a disadvantage. Therefore, Liedtke believes that if they takeover Mercury will double AGI’s revenue, increase it’s leverage with contract manufactures and expand its presence with key retailers and distributions. Liedtke is evaluating the company in order to find out whether the future benefits justify or surpass the present value of the investment in Mercury. Analysis: In order for Liedtke to get a broader picture on the acquisition of Mercury, he needs to compare and analyze a list of financial data from 2006 to 2011; projected balance sheet accounts, operating results and free cash flows, and cost of capital calculations. This data will enable him to identify the strengths and weaknesses of this acquisition. First lets look a summary of the operations of both AGI and Mercury Athletics’ actual operations based on the last year given 2006 before AGI plans of acquiring Mercury. | |Active Gear, Inc |Mercury Athletic ...
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...F745 Valuation and Capital Investments Assignment 2 | Contents Mercury Footwear 1 Appendix A-1 Mercury Footwear Question 1 We think that this acquisition makes sense for AGI, for a number of reasons. First, the Mercury product portfolio gives AGI access to growing markets that they have not had access to in the past. Specifically, Mercury’s products have become popular with a loyal market of extreme sports enthusiasts that has seen recent sales growth. This could be a nice complement to AGI’s current brand, which is associated with a prosperous, active lifestyle. Just as importantly, there are potential synergies related to manufacturing. As mentioned in the case, there has been a recent wave of consolidation among Chinese contract manufacturers (used by both AGI and Mercury) that has been to the disadvantage of smaller companies. Acquiring Mercury would roughly double AGI’s revenues and allow them to offer longer production runs, build stronger relationships and negotiate better terms with their current manufacturers. There is further potential to consolidate suppliers and reduce the number of staff needed for on-site monitoring, creating efficiencies and cost reductions in the process. Additionally, numerous factors (proliferation of brands, underperforming lines) have served to strain Mercury’s infrastructure recently. AGI could potentially unlock some untapped value at Mercury by focusing on performing brands and winding down unprofitable segments such...
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...MERCURY ATHLETIC FOOTWEAR Problem statement: West Coast Fashions, Inc a large business of men’s and women’s apparel decided to dispose of one of their segments; Mercury Athletic. John Liedtke, head of the business development for Active Gear, Inc saw it has a possible opportunity for them to acquire it. The footwear industry is very competitive, with low growth and stable profit margins. AGI is very profitable but it is smaller than its competitors, which is becoming a disadvantage. Therefore, Liedtke believes that if they takeover Mercury will double AGI’s revenue, increase it’s leverage with contract manufactures and expand its presence with key retailers and distributions. Liedtke is evaluating the company in order to find out whether the future benefits justify or surpass the present value of the investment in Mercury. Analysis: In order for Liedtke to get a broader picture on the acquisition of Mercury, he needs to compare and analyze a list of financial data from 2006 to 2011; projected balance sheet accounts, operating results and free cash flows, and cost of capital calculations. This data will enable him to identify the strengths and weaknesses of this acquisition. First lets look a summary of the operations of both AGI and Mercury Athletics’ actual operations based on the last year given 2006 before AGI plans of acquiring Mercury. | Active Gear, Inc | Mercury Athletic | Revenues | $470, 286 m | $431,121 m | % Of Revenue Product | 42 % athletic...
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