Mercury Athletic

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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 / 58 % casual| 79 % athletic / 21 % casual| Operating Income | $60.4 m| $42,299 m|
Revenue Growth | $2-6% | 12.5 % |

By looking at this table superficially and keeping in mind that Active Gear is one of the most profitable firms in the footwear industry, Mercury seems to be an attractive investment because they have almost the same revenues as AGI while being smaller in the market. Then we can see that the % revenue product compensates for the lack in both companies. The revenue for the athletic shoes in AGI is low therefore taking Mercury under their wing would increase that revenue and vice versa for the casual shoes as well. Finally when looking at revenue growth the industry average is 10 % and AGI is below it putting the company at risk while Mercury is above it by 2.5 % more, it would be good to acquire the company to stay on top of the market.

Free cash Flow of Mercury
| 2006| 2007| 2008| 2009| 2010| 2011|
Revenue | 431,121.00 | 479,329.00 | 489,028.00 | 532,137.00 | 570,319.00 | 597,717.00 | Less: divisional operating expenses| 423,837.00 | 427,333.00 | 465,110.00 | 498,535.00 | 522,522.00 | Less: corporate overhead| | 8,487.00 | 8,659.00 | 9,422.00 | 10,098.00 | 10,583.00 | EBIT| 42,299.00 | 47,005.00 | 53,036.00 | 57,605.00 | 61,686.00 | 64,612.00 | Less: taxes| 16,919.60 | 18,802.00 | 21,214.40 | 23,042.00 | 24,674.40 | 25,844.80 | NOPAT (EBIT (1-t)| 25,379.40 | 28,203.00 | 31,821.60 | 34,563.00 | 37,011.60 | 38,767.20 | Plus: depreciation| 9,506.00 | 9,587.00 | 9,781.00 | 10,643.00 | 11,406.00 | 11,954.00 | Net working capital| 104,116.00 | 108,685.00 | 111,333.00 | 121,138.00 | 129,825.00 | 136,059.00 | Less: changes in working capital| | 4,569.00 | 2,648.00 | 9,805.00 | 8,687.00 | 6,234.00 | Less: capital expenditures| | 11,983.00 | 12,226.00 | 13,303.00 | 14,258.00 | 14,943.00 | Less: changes in other assets| | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | Plus: changes in other liabilities| | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | Free cash Flow| | 21,238.00 | 26,728.60 | 22,098.00 | 25,472.60 | 29,544.20 | Terminal Value| | | | | | 522,906.19 |

| | | | | | |
Discount Rate| 7.65%| | | | | |
Growth rate| 2.00%| | | | | |
Discount cash flow| | 19,728.75 | 23,064.72 | 17,713.76 | 18,967.81 | 382,140.54 | The total discount cash flow| 461,615.58 | | | | | | | | |...
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