Mercury Athletic Footwear Essay

1. participating Gear is a relatively small athletic and daily footwear company $470.3 million of tax and $60.4 million of EBIT comp atomic number 18d to typical competitors that sold well over a $1.0 billion annually Company executives felt up its small size was becoming more of a disadvantage due to consolidation among Chinese wedge manufacturers. Specialty athletic footwear that evolved from high performance to athletic fashion wear with a clean appeal. Casual/re understructureal footwear for walking, hiking, boating, etc.. Affluent urban & suburbanites in the 25-45 age range (i.e. Yuppies). Brands are associated with upwards mobile lifestyle. Department & specialty stores no big box retailers.2. Company strengthsBy focusing on a portfolio of classic brands, Active Gear has been able to lengthen its product lifecycle. In turn, this has led to slight operating volatility and better supply chain management as well as pull down DSI3. Company weaknessesBy avoiding the chase f or the latest fashion trend and avoiding big box retailers, the company has had actually low growth4. Mercury was a subsidiary of a full-grown 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 individually Under the egis of WCF, Mercurys performance was mixed. WCF was able to expand sales of footwear, but was neer able to establish the hoped for apparel line5. Products, Customers and 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. in the main associated with X-games enthusiasts and youth culture Products were sold primarily through a wide range of retail, department, and specialty stores including brush off retailers6. Company strengthsEstablished brand and identity within a well-defined niche commercialize that seems to be growi ng. 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 large retailers. Proliferation of brands led to decreased operating efficiency and a chronic DSI. Womens casual footwear was a disaster Central Question What Are 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 abide by?How would any potential sources of value be realized?Potential sources of value creationOperating synergies coming from economies of scale with respect to contract manufacturers Perhaps some economies of scope with respect to diffusion extending the distribution network Possible combination of the womens casual linesCounter arguments to value creation unforesightful strategic fit Mercurys focus is on a totally different market demographic Likewise, Mercurys ni che maybe significantly more prone to fashion fads act growth of extreme sports category may make Mercurys strain vulnerable to the large athletic shoe companiesFirm Value & Cash Flows1. As a starting point, lets start with a basic valuation paradigmNote that the sole determinant of value is the multiplication 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 random distributionDetermination of FCFTo begin, the preceding equation led to a value of the entire enterprise, meaning V = D + E Thus, we are interested 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, Multiplying EBIT by (1-t) yields the premier(prenominal) term in the FCF equat ionQuestion Are taxes being overstated?It is true that interest set down creates a tax shieldHowever, the value of the tax shield is acknowledged in the WACC or in a separate calculation when using APV