Question 1
Mercury is indeed an appropriate acquisition target for AGI because of several reasons. First, the acquisition of Mercury could actually financially improve both companies. Acquiring Mercury would double the revenue of AGI. In spite of the fact that the financial performance of Mercury has been relatively disappointing, the company did however experience a 20% top line growth in the year 2006.
Unfortunately, the two companies have been exhibiting disappointing profitability. This can be attributed to their prices concessions to the industry’s big retailers and also to a women’s line that was quite unsuccessful.
Therefore, the profitability of Mercury and AGI could be actively improved by the synergies that will result when the two companies merge. The synergies within operations, supply chain, advertising and research and development should ultimately improve the EBITDA of Mercury.
Secondly, the increase in the size of AGI that will result when it takes over Mercury will lead to the realization of several supply chain benefits. This will be very beneficial to AGI seeing that presently, it is actually very small when compared to its competitors and this is an aspect that has been placing them at a competitive disadvantage form the standpoint of supply chain.
Third, AGI should go ahead and acquire Mercury because the acquisition will bring about extra marketing advantages. The market scope of AGI will essentially be widened due to its penetration of the 15 to 25 year market that was previously held by Mercury.
Question 2
In his preliminary valuation and analysis, Liedtke came up with a basis of making financial projections based on the revenue forecasts and operating income for all the four Mercury’s major segments namely; the men’s athletic footwear, men’s casual footwear, women’s athletic footwear and women’s casual wear. Liedtke’s approach in coming up with projection was rendered inefficient because the projections were based on historical values.
Moreover, his valuation of the four principle segments varied from one financial document to the other .For instance, in his projections of the women’s casual footwear he projected that the segment brought no income and neither did the company incur any operating expenses. Since this was a product on sale since 2004, we do not expect zero values for its income and operating expenses. Since 2007 ,from his projections ,it appears as though women casual footwear were nonexistent .He should have used the values for earlier years preferably 2004-2006 to come up with projections for the years 2007-2011.The projections he made on this segment must have rendering his entire approach in projections less efficient.
Question 3
Free Cash Flow of Mercury ($ in thousands)
2006 2007 2008 2009 2010 2011
Revenue 431,121 479,329 489,028 532,137 570,319 597,717
Less; Divisional operating
expenses 423,837 427,333 465,110 498,535 522,522
Less; Corporate overhead 8,487 8,659 9,422 10,098 10,583
EBIT 42,299 47,005 53,036 57, 605 61,686 64,612
Less: taxes 16, 619 18,802 21,214 23,042 24,674.40 25,844.80
NOPAT (EBIT (1-t) 25,379.40 28,203 31,821.60 34,563 37,011.60 38,767.20
Plus: depreciation 9,506 9,587 9,781 10,643 11,406 11,954
Net working
Capital 104,116 108,685 111,333 121, 138 129,825 136,059
Less: changes in
working capital 4, 569 2,648 9,805 8,687 6,234
Less: capital expenditures 11,983 12,226 13, 303 14,258 14,943
Less: others assets changes 0 0 0 0 0
Plus: other liabilities changes 0 0 0 0 0
Free cash flow 21, 238 26,728 22, 098 25,472.60 29, 544.19
Terminal value 522,906.19
Discount rate 7.65%
Growth rate 2.00%
Discount cash flow 19,728.75 23,064.72 17,713.76 18,976.81 382,140.54
The total discount
cash flow: 461,615.58
Acquisition price 186, 215.80
NPV 275,399.78
Assumption
- The women’s casual footwear did not generate any revenue and neither did the company incur any operating expenses between the years 2007 and 2011.
As seen above, the valuation of Mercury using the discounted cash flow approach and Liedtke’s base case projections show that it has a net Present Value of $275, 399,780.
