There are several reasons why AGI should consider Mercury Athletic as an appropriate target for acquisition. First, acquiring Mercury could improve both companies financially. Acquiring Mercury would double AGI’s revenue. Although Mercury’s financial performance has been disappointing, they experienced top line growth of 20% in 2006. Unfortunately, their profitability has been disappointing due to price concessions to big box retailers and an unsuccessful women’s line. Mercury’s (and ultimately AGI’s) profitability could be improved by the synergies of the two companies merging. Synergies within supply chain, operations, research and development, and advertising should all improve Mercury’s EBITDA.
Second, by increasing the size of the AGI they would realize certain supply chain benefits. Presently, AGI is much smaller than its competitors, and that is putting them at a competitive disadvantage from a supply chain standpoint. Because of consolidation of Chinese manufacturers, AGI and its competitors were being pressured to commit to larger manufacturing runs in an effort to increase capacity utilization. With fewer and bigger Chinese manufacturers, larger shoe sellers would have an advantage. By roughly doubling the volume after the proposed acquisition, AGI would be in a better negotiating position. Also, Mercury could easily adopt AGI’s inventory management system which would help to improve their higher-than-average Days Sales in Inventory numbers.
Third, this acquisition would present some possible marketing advantages. It would widen the market that AGI was able to reach. It would expand its current market of 25 to 45 year olds to the 15 to 25 year old demographic that Mercury serves. Also, it would add a brand with price points that were lower than theirs, allowing them to reach more customers. This would allow them growth by reaching a new demographic without competing with or cannibalizing their current market. Also, despite the unsuccessfulness of Mercury’s women’s line, it may be able to be turned around by folding it into AGI’s women’s line.
There are reasons for pause, however, in considering the acquisition. Although there are some marketing benefits, the two lines are not overly complementary. They should probably be marketed as separate brands because of the disparity in brand image. Also, if the women’s casual line could not be improved by folding it into AGI’s, it would have to be discontinued. With all the factors considered though, the acquisition appears to have more advantages for both companies than disadvantages.
Liedtke’s projections for Mercury call for an average annual growth in revenue of 6.8% and growth in operating margin of 10.62%. His projections of the operating margin growth are probably conservative and should be increased. Based on historical data for the past three years, the growth at Mercury has been about 9.3% a year. If the unprofitable women’s casual line is removed from the analysis of historical data (as it will likely be discontinued), the average margin growth for the past three years would be 10.6% – roughly the same as what he is projecting for the next four years. If the women’s casual line is discontinued or if it is improved by folding it into the AGI line, it would increase the average annual operating margin for the whole business over the projected 10.62%. This would indicate that he is projecting margin growth to remain flat at about 10.6% His projections do not seem to take into account the added synergies of the two merged companies that would improve margins. These synergies should reduce operating expenses, such as supply chain, operating, and marketing costs, and improve margins over both brands. His projections for growth in revenue also seem conservative. Annual revenue growth based on available historical data is 12.75% – much higher than the 6.8% he is projecting. Also, once the women’s casual line is removed from...
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