Mercury Athletic is the footwear division of West Coast Fashions (WCF), a designer and
distributer of branded athletic and casual footwear, targeted at youth market. Due to strategy
reorganization, WCF wanted to shed this segment. In the meantime, Active Gear, Inc., (AGI)
looked to acquire Mercury from WCF, believing that the purchase would double its revenue
and provide greater leverage with manufacturers and distributors. This case illustrated that
Liedtke used base case assumptions to value Mercury, and also wanted to consider the value
of possible synergies as well to justify that whether investing in Mercury would significantly
improve AGI’s business. In order to achieve the above set goal, our group estimate financial
data of the merged company from 2007-2011 based on each’s historical data. Regarding the
DCF model valuation, using a WACC of 12.17% and long term growth rate 7.42% for the
terminal value, then we concluded value of $458.31 million at the end of fiscal 2006. In
addition, we primarily considered potential benefits and opportunities based on horizontal
acquisition, which could bring about scale effect and resource complementary. Finally, these
possible synergies should be taken into account to adjust our evaluation on acquisition.
AGI is a small footwear company founded in 1965. The simplified supply chain management
and no selling through discount retailers are two key factors that helped maintain high
profitability in the industry. However, the management team faced dilemma of small size and
slow revenue growth.
Mercury had two main problems. The one was that the company has performed worse since it
was merged by WCF. Especially the new apparel segment turned to be unsuccessful. Also, to
gain higher revenue growth, Mercury sold products at discount prices, which hurt its
operating margin badly.
Qualitative Valuation: Mercury is an appropriate target for...