Mercury Athletic Footwear Essay

1. Active Gear is a relatively small athletic and routine footwear company $470.3 million of revenue and $60.4 million of EBIT compargond to typical competitors that sell well over a $1.0 billion annually friendship executives matte up its small size was becoming more of a disadvant duration receivable to consolidation among Chinese contract manufacturers. Specialty athletic footwear that evolved from gritty performance to athletic fashion wear with a unstained appeal. occasional(a)/recreational footwear for walking, hiking, boating, etc.. Affluent urban & suburbanites in the 25-45 age roll (i.e. Yuppies). Brands are associated with upwardly mobile lifestyle. Department & specialty stores no capacious box retailers.2. Company strengthsBy focusing on a portfolio of classic patsys, Active Gear has been able to lengthen its product lifecycle. In turn, this has conduct to less run volatility and better supply chain vigilance as well as lower DSI3. Company weaknessesBy avoid ing the label for the latest fashion trend and avoiding big box retailers, the company has had genuinely low exploitation4. Mercury was a subsidiary of a magnanimous apparel companyAs a result of a strategic realignment, the division was considered to be non-core. 2006 revenue and EBITDA were $431.1 million and $51.8 million respectively down the stairs the egis of WCF, Mercurys performance was mixed. WCF was able to expand gross revenue of footwear, but was never able to establish the hoped for apparel line5. Products, Customers and statistical distributionMens and womens athletic and casual footwear. Most products were priced in the mid-range. More contemporary fashion orientation Typical customers were in the 15-25 age range. Primarily associated with X-games enthusiasts and youth culture Products were sold primarily through a wide range of retail, department, and specialty stores including discount retailers6. Company strengthsEstablished brand and identity within a well-d efined inlet market that seems to be growing. Strong top-line growth resulting from inroads with majorretailers. Products were less complex and therefore, cheaper to produce7. Company weaknessesIncreased sales came as a result of pricing concessions to heavy(a) retailers. Proliferation of brands led to decreased operating efficiency and a longer DSI. Womens casual footwear was a disaster Central Question What be the Likely Rationales for a Combination of Active Gear and Mercury? How do the acquirer and target fit together?What are the potential sources of esteem?How would any potential sources of rank be realized?Potential sources of take account creationOperating synergies coming from economies of scale with respect to contract manufacturers maybe some economies of scope with respect to distribution extending the distribution network mathematical combination of the womens casual linesCounter arguments to rank creation scant(p) strategic fit Mercurys focus is on a totally different market demographic Likewise, Mercurys niche maybe significantly more prone to fashion fads Continued growth of extreme sports category may make Mercurys commercial enterprise vulnerable to the large athletic shoe companiesFirm Value & bullion Flows1. As a starting point, lets start with a basic valuation paradigmNote that the sole determinant of value is the generation of cash flow Further the only relevant factors are the amounts, timing and risks of the cash flows FCF is assumed to be the mean of an a stochastic distribution object of FCFTo begin, the preceding equation led to a value of the entire enterprise, meaning V = D + E Thus, we are implicated in what the total business is worth irrespective of who gets the cash or how its financed In turn, thismeans we are interested in the un-levered FCFUn-Levered FCF = EBIT(1-t) + Depr WC Cap-xDetermination of FCFIn case Exhibit 6, Liedtke provides a set of projections for each of the operating segments Thus, Multiplyi ng EBIT by (1-t) yields the first term in the FCF equationQuestion ar assesses being overstated?It is true that interest expense creates a tax shieldHowever, the value of the tax shield is acknowledged in the WACC or in a separate calculation when using APV