Mercury Financial Valuation Case

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Mercury Athletic Footwear: Valuing the Opportunity
Team 10 / Mergers and Acquisitions
West Coast Fashions, Inc (WCF) was a large business, which dealt with men’s and women’s apparel. One of their segments was Mercury Athletic Footwear. WCF wanted to dispose off this segment. They just wanted to divest because they wanted to focus more on their core business and move it up to the elite class. John Liedtke was the Business Development Head at that time in Active Gear Inc. He had a clear idea that acquiring Mercury will shoot up AGI’s revenues for sure. It would also ensure an expansion of the key business. In order to get a clearer picture on the acquisition, he needed to compare and analyze the company’s financials well. By this he could gauge the pros and cons of this acquisition. Are the strategic reasons behind the Merger good enough? Explain As a team, we had different views on this question. Some reasons make us think that it may be beneficial for AGI to grab the opportunity but some make us think that it might not be as promising as it seems. Let us see why we feel it is a good idea for AGI to acquire Mercury.

Active Gear Inc.
Mercury Athletic Footwear
Revenue
$470,285mn
$431,121mn
% Revenue Product wise
42% Athletic 58% Casual
79% Athletic 21% Casual
Operating Income
$60.4mn
$42,299mn
Revenue growth
2% to 6%
12.5%

Active Gear was one of the most successful firms in terms of profitability, in the footwear industry. Mercury looked like a good opportunity for an attractive investment because they almost have the same revenues, while being smaller in size, in the market. The Percent revenue in the casual footwear in AGI compensates for the gap in Mercury. It’s a perfect balance. When we looked at the industrial average of revenue growth is 10% and AGI is below the standard, however Mercury is above by 2.55%. It is a good sign to move ahead for this acquisition, as it will enable AGI to remain at the top in the market. Both companies are in the same industry and have same products. Both Mercury and AGI does its manufacturing in China. AGI sourced its resources to the contract manufacturers in China. Mercury can leverage with these manufacturers as China just experienced a wave of consolidation favorable for these kinds of manufacturers. This, in turn, can enable AGI to have the opportunity to expand with its top retailers and distributors. Mercury’s cost of manufacturing is low and could help to sync the lower profit margins of AGI, which it had been facing from its suppliers, distributors and consumers. (Refer Case Page 5 and 3). Mercury had always been an autonomous body, which maintained its own financials, data management, resource management and distribution. This would pave a smooth way for AGI to take over. This smoothness could not have been expected had Mercury been totally under WCF. Now let us look at why some of the members of the team thought that the acquisition is not an appropriate decision: There would be strategic clashes because AGI focuses on Classic and elite products with long life, on the other hand, Mercury focused on flexibility and changed its products based on demand and trend. (Refer Case study Page 2 and 4). There is a huge difference in days Inventory between the two companies. It means that there must be a strategy of keeping their products on shelf. We also come to know that Liedtke believed that Mercury can adopt the Inventory Management of AGI and a bit incremental cost and then it might reduce the levels of DSI of Mercury. Mercury also concentrated on a different geographic section than AGI. We also think that this Acquisition might just entail a complete take-over of the Women’s line of Mercury. However, it might me a loss making business for AGI later (Refer case study Page 6). Review the projections by Liedtke. Are they appropriate? How would you recommend modifying them? We put the Exhibit 7 for reference:

As a team we analyzed each segment’s...
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