Mercury Athletic

Executive Summary: 

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. 

Background Information: 

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.  

Analysis: 

Qualitative Valuation: Mercury is an appropriate target for AGI. 

Firstly, AGI could expand its size to compete with other competitors by acquiring Mercury. Meanwhile, AGI could reduce outsource fees and reach Asian markets after merging.   

What is more, AGI could gain huge revenue growth by acquiring Mercury, because these two firms have non-overlapping target customers. AGI’s target customers are mainly affluent people aged between 25 and 45. In contrast, Mercury’s products are in the lower-end, whose targets customers are mainly youth between 15 and 25. Besides, Mercury’s disappointed women’s footwear might win huge profit with its establishment of brand after folded into