Mercury Athletic Case Essay

West Coast Fashions, Inc. (WCF), a large designer and marketer of mens and womens branded apparel tardily announced plans for a strategic reorganization. Active Gear, Inc. (AG), a privately held foot seize come with, was contemplating an acquisition opportunity. John Liedtke, the head of transaction development for AG, was interested in a WCF subsidiary. The subsidiary that Liedtke and AG intended to acquire was Mercury Athletic (MA), a footwear company. Liedtke thought acquiring Mercury would roughly double AGs revenue, increase its leverage with contract manufacturers and expand its presence with key retailers and distributors. In order to provide a solid recommendation to Liedtke, further analysis moldiness be performed.Market OverviewThe apparel or footwear industry is highly competitive with low growth. The market is influenced by fashion trends, price, quality and style. Companies can debase risk factors by not following fashion trends which equates to efficient and good i nventory management and missed profit opportunities.Active GearAG is a relatively small athletic and casual footwear company. It has annual revenues of $470.3M (42% of revenues came from athletic shoes), and $60.4M of operating income. Casting a shadow over these numbers are AGs typical competitors. AGs typical competitor has annual sales over $1.0B. Because of Chinese manufacturing contract consolidations, AGs size was fitting a disadvantage due to low buying power vs. competitors. AGs initial focus was to produce and market high-quality specialty shoes for golf game and tennis players. AG was among the first companies to offer fashionable, walking, hiking and boating footwear. Over the years, the firms athletic shoes had evolved from high-performance footwear to athletic fashion wear with aclassic image.The firms traditional casual shoes also offered classic styling, but were aimed at a broader, more mainstream market. AGs target demographic was urban and suburbanites, ranging fr om 25-45 in age. AGs distribution channels consisted of independent retailers, departmental stores, and wholesalers. AG excluded wide box retailers and discount stores. AG focused on intersection points that didnt follow fashion trends, resulting in a lengthened product lifecycle. This business model led to more efficient and effective supply chain and operating management. However, because they opted for the safe route it halted the companys sales and growth opportunity.Mercury AthleticMercury Athletic was purchased by WCF from its throw Daniel Fiore. Fiore was forced to sell the company after running it for over 35 years, due to health problems. Due to a strategic reorganization, the plan called for the divestiture of MA and separate non-core WCF assets. MA had revenues of $431.1M and an EBITDA of $51.8MProducts were distributed to departmental and discount storesIt had two product lines- athletic and casual footwearTarget market of some(prenominal) men and womenShoes popular ity grew in the extreme sports marketMA developed an operating infrastructure, allowing management to quickly adapt to changes in customer tastes with product specifications. 1. Is Mercury an appropriate target for AG? why or why not?Let me walk you through some qualitative considerations before making my recommendation.Strategic considerationsAG and MA are both competing in the athletic and casual footwear industry. Acquiring MA could lead to economies of scale and scope through manufacturing and distribution networks, respectively. Acquiring MA- AG would be little affected by the Chinese manufacturing contract consolidation, due to increased buying powers. AG could potentially revive and profit from acquiring Mercurys womens product line. Acquiring MA will double AGsannual revenue.Counter arguments-AG and MA target demographics could not produce company synergies MA is fashion trendy, therefore prone to risks outside of AGs steady business model Company cultures could not match2 . Review the projections by Liedtke. Are they appropriate? How would you recommend modifying them? In order to find if the projections are reasonable, you need a starting point. Using projected growth rates and EBIT should aim if Liedtkes data is solid. Referencing the Free Cash Flow and Terminal evaluate tables (found below), I will be able to generate an opinion of Liedtkes projections. course of instruction to year growth rates are extremely volatile, normalizing in 2010.The negative rate could signify that in 2007 they are projecting to discontinue a product line. The swing back to a positive growth rate could be indication of AG leveraging its economies of scale and scope, while distributing their product lines through big box retailers. EBIT has been projected to gradually increase, which looks to be on par with industry norms. It is reasonable to say that Liedtkes projections properly reflect AGs business model, post-acquisition.3. See tables and calculations below4. Do yo u regard the value you obtained as conservative or aggressive? Why? From my analysis, the value I obtained seemed to be aggressive against the instruction provided. Referencing the tables belowTerminal or Enterprise Value is HighSynergies are excluded from financial analysisDeclining revenue growth5. How would you analyze possible synergies or other sources of value not reflected in Liedtkes base assumption? In order to analyze possible synergies, I would look at both companies operations. head start from where they source their materials to distributing their final product are all possibilities of operational synergies (buying power, distribution channels, inventory management, etc). Financial synergies would include combining revenues and cost benefits, which translate to increasing empennage line.Company culture matching could also become problematic.Quantitative AnalysisNet Working CapitalFree Cash FlowWACCTerminal ValueValuationNPV, IRR and Payback PeriodConclusionNet prese nt value of future cash flows equates to a positive $0.2M. Internal rate of return or IRR is the interest rate at which the net present value of all the cash flows from a project or investment equal zero. The IRR of this acquisition is 28%. Having a positive NPV and an IRR that considerably outweighs the discount and risk free rate- suggests that this acquisition should be pursued. In conclusion, AG should acquire MA.