14.8% 3 million in revenue in 2006, making it relatively small compared to big players in the Free Cash flow Executive Summary Great pressure from suppliers and competitors caused some deterioration of basic performance for AGI during 2004–2006. Considering that there are five main channels for analyst forecasts: firm-specific information, macroeconomic information, information revealed by competitors on future prospects, private information about the firm and public information other than earnings, we think Liedtke could find more information from above channles to get more accurate assumption. Estimation the value of Mercury based on discounted cash flows and Liedtke’s base case projections. (2) then we need to calculate the terminal value. Cost of Capital =debt ratio *cost of debt +equity ratio * cost of equity, We can get the cost of Capital in 2012, 12.7%. Cost of Capital We assume the cost of equity equal return on equity, we can calculate the historical return on equity from 2007- 2011 is as below, Return on equity, 12.8% Good at inventory management in the industry. Your name. Estimate the value of Mercury using a discounted cash flow approach and Liedtke’s base case projections. . An Overview of the Problem John Liedtke, the head of business development for Active Gear, Inc. wanted to acquire Mercury Athletic, footwear division of WCF. And since the revenue is almost the same, it is a good choice to merge with Mercury, which means that revenue would be doubled after acquisition. The case focuses on the strategic and financial evaluation, The case provides the opportunity to forecast the cash flows associated with the proposed, acquisition and to value those projections using discounted cash flows methods as well as, multiples. Mercury Athletic Footwear Case Study John Liedtke head of Active Gear, Inc. (AGI) is contemplating whether to invest in Mercury Athletic a subsidiary of West Coast Fashions (WCF). And sometimes, analyst should be better than the historical growth. Therefore, take into above factors into account; we think that Mercury should be an appropriate target for AGI. John Liedtke, head of the business development for Active Gear, Inc saw … The Charles H. Kellstadt Graduate School of Business DePaul University FIN 555: Financial Management Prof. Joseph Vu Case Study Questions: Mercury Athletic Footwear Active Gear, Inc. (AGI), a privately held footwear company, was considering acquiring Mercury Athletic, the footwear division of West Coast Fashions, Inc. (WCF), a large apparel company. As such, you are to assess your level of interest in pursing the acquisition of Mercury Athletic Footwear (MAF), which is being divested by West Coast Fashions, Inc. (WCF). John Liedtke, head of the business development for Active Gear, Inc saw … It is good for them to increase the performance of inventory management if they merge together. (4) Alternative method to calculate cost of capital, then value of Mercury: We have learnt from Exhibit 3 of peer companies information in this business, we can calculate cost of capital in alternative ways. Women’s casual footwear is Mercury’s worst performing product and post-acquisition the line may be discontinued by Active Gear. How would you analyze possible synergies or other sources of value not reflected in Liedtke’s base case assumptions? Get a verified writer to help you with ?Mercury Footwear Questions, (4) In this market, it is important for the brand image, specialized engineering for performance and price. We take 14% as reference. Total value of Mercury will be 247,479, which is the estimate Firm value of Mercury under the alternative method. We use cookies to give you the best experience possible. Outsource manufacture in China. Mercury Athletic Footwear : valuing the opportunity. $60.4mn. History AGI is a profitable company; however, its size is not large enough to cater for market expansion opportunities. $42,299mn. I think if AGI can reduce the cost of capital, which will show the great synergic effect to the acquisition. (3) The product segments are almost the same, which means that there should be little work to do after acquisition in product adjustment. In the case, we could find that Liedtke used historical averages to assume the overhead-to-revenue ratio. Athletic Footwear Market Overview. Unlevered beta for business= Beta comparable firms/[1+(1-t)(D/E ratio comparable firms)] From information provided in Exhibit, we can get average Beta and D/E ratio, is 1.56, 24.9% respectively. 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. In order to summarize, due to AGI’s small size, there is a strong risk of being overtaken by the other giant players in the market therefore, if it acquires Mercury, the risk will be minimized and there is a strong opportunity that the company will grow steadily. Introducing Textbook Solutions. we assume risk free rate is 5%, and risk premium as the historically one 4.3%. (5). Terminal Value=EBIT n+1*(1-t)/cost of Capital, we can get Terminal Value in 2011 is 315,237. 14.9% Revenue. Mercury was purchased by WCF in hopes to increase business revenue however this was not the case. -Founded in 1968 by Daniel Fiore -Producer, designer and distributor of branded athletic and We can find during the period from 2007- 2011, the growth rate of net income is not stable, so we assume from 2012, Mercury enter into stable and slow development stage. Boosta Ltd - 10 Kyriakou Matsi, Liliana building, office 203, 1082, Nicosia, Cyprus. We can find during the period from 2008- 2011, the reinvestment rate 15.57%- 37.1%, we just take a middle one 24.37%, by multi reinvestment rate and cost of capital (assume cost of capital =return on capital), to reach growth rate afterwards= 3.09%. (3) Under alternative method, the expected g is much lower as 2.6%, the risk free rate is also a medium one, and the risk premium is a historical one, which is much higher than recent risk premium in USA. We have get the cash flows of 2007-2011 and terminal value in 2011, and the cost of capital is 12.7%, we can get the respective present value of them and reach the total present value 226,514, which is the estimate Firm value of Mercury. 42% of revenue from athletic shoes and balance from casual footwear. As for synergy, the management of inventory has not shown great synergic effect to the outcome, for from 2007 to 2011, inventory level has not reduced. How would you recommend modifying them? (4) Thanks to the profitable ability of AGI, it is much easier to make a better financial performance of Mercury. The outcome of this investment would be a reduction in the number of inventory days from 61.1 days to 42.5 days. Get this from a library! Mercury Athletic Footwear Case Mercury athletic footwear Group 7 Contents Executive Summary & Overview of Problems 3 Analysis on Mercury acquisition 4 Reasons why Mercury is an appropriate target for AGI 4 2. Mainly sold in department stores, specialty retailers, wholesalers and independent distributors. The subordinate that Liedtke and AG intended to get was Mercury Athletic ( MA ) . Mercury Athletic Footwear Case Solution QUESTION 1 If we look at the valuation of Mercury for the part D and part F, then a difference could be seen between the enterprise values. expect g and terminal value in 2011 will be 2.6% and 374,576 respectively. 79% Athletic 21% Casual. Mercury Athletic is quite an established company in the footwear industry. Active Gear was one of the most successful firms in terms of profitability, in the footwear industry. Athletic shoes developed from high-performance footwear to athletic fashion wear. increase its purchase with contract makers and spread out its presence with cardinal retail merchants and distributers. RE: Mercury Athletic valuation and acquisition recommendations. Liedtke thought geting Mercury would approximately duplicate AG’s gross. 14.1% Don't be confused, we're about to change the rest of it. – (Capital Expenditures – Depreciation) And these two companies have some similar factors, such as : (1) They could use the same sale channels after acquisition, and internet channel could be enlarged. Reason. Youth market, mainly 15 to 25. (1)first of all, to calculate the cash flows from 2007 to 2011, Net Income Students looking for free, top-notch essay and term paper samples on various topics. Sales growth is lower than the average level re on board with our cookie policy footwear athletic! The company is iconoclastic and nonconformist easier to make a better financial performance inventory... Specialty stores, boutiques and wholesalers do n't be confused, we will try to respond as as... And operating income were 470.3 million and EBITDA were 431.1 million and million... 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