Mercury Athletic Footwear

Mercury Athletic Footwear: Valuing the Opportunity Active Gear, Inc. (AGI) is a privately held footwear company and is contemplating the possibility of acquiring Mercury Athletic Footwear. West Coast Fashions Inc., a large designer and marketer of men’s and women’s branded apparel recently announced that it plans to shed its Mercury Athletic Footwear subsidiary. AGI’s head of business development, John Liedtke, believes acquiring Mercury Athletic Footwear is a good option for the company. Although AGI is currently among the most profitable firms in the footwear industry, it is also much smaller than most of its competitors, which the company’s management views as a competitive disadvantage. During the past three years AGI’s revenue has grown at an average annual rate of only 2.2% while the industry average is about 9.7%. Liedtke believes that acquiring Mercury Athletic Footwear would double AGI’s revenue, increase its leverage with contract manufactures, and expand AGI’s presence in relators and distributers. Before acquiring Mercury Athletic Footwear, Liedtke wants a complete evaluation of the opportunity.
Quantitative Analysis An effective method of quantitatively evaluating a possible acquisition of a company is to complete an excess free cash flow analysis. This method is designed to estimate the present value of a business. To run this analysis, an analyst needs to determine the correct discount rate to use, which is also a company’s estimated weighted average cost of capital. An estimation of a company’s long-term growth rate also needs to be made. Then using this estimated growth rate an analyst needs to determine the excess free cash flow per period, which is the amount of cash that a business can payout to investors after paying for all investments necessary for growth. To find this, an analyst usually determines, for each period, the net income after taxes. Then add back the depreciation expense and take into consideration the effects that