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Mercury Athletic Footwear Case

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Mercury Athletic Footwear Case
Mercury athletic footwear
Group 7

Contents
Executive Summary & Overview of Problems 3
Analysis on Mercury acquisition 4
1. Reasons why Mercury is an appropriate target for AGI 4
2. Estimation the value of Mercury based on discounted cash flows and Liedtke’s base case projections. 4
a. Estimation of the weighted average cost of capital 5
b. Estimation of the free cash flows from 2007 to 2011 5
c. Estimation for long-term growth rate and estimate the terminal value 5
d. Estimation value of Mercury based on estimates from (a) to (c) 6
3. Synergy Effects of the Acquisition 6

Executive Summary
Great pressure from suppliers and competitors caused some deterioration of basic performance for AGI during 2004–2006. Two main problems are continuing low growth rate because of serious competition of the mature footwear industry and rise of discount retailors, and pressure from supplies to boost capacity utilization because of its relative smaller firm. AGI can solve these problems by merging with Mercury Athletic.
There are four main reasons supporting this acquisition. First of all, this acquisition would not be costly since AGI and Mercury share several similar characteristics in footwear industry. Second, this combination would expand firm size and help AGI achieve good bargains with suppliers. Third, AGI’s growth rate would benefit from additional sales channels and enlarged target customers. Finally, AGI could enjoy a positive synergy effects.
Overview of problems
The footwear industry is mature, highly competitive with low growth but stable profit margins. Active Gear Inc. was among the most profitable firms in the footwear industry. Currently, pressure from suppliers and competitors caused some deterioration of basic performance for AGI during 2004–2006. There are two main problems. One is that AGI is smaller than other competitors, which is becoming a competitive disadvantage. Another is that the rise of “big box” retailers threatened AGI’s growth. One of
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