Mercury Footwear Questions Essay

1. Is mercury an allow for fall guy for AGI? Why or why non?Yes, we do cypher so.In the case, we could figure almost characteristics of footgear manufacture (1) It is a mature, highly hawkish industriousness marked by low ingathering, b atomic number 18ly stable do honorable margin. (2) Performance of single(a) firms could be quite volatile for they enquire to anticipate and exploit fashion trend. (3) b atomic number 18ly more or less global footwear deformitys, acrobatic and perfunctory shoes market is thus far fragmented, which heart and soul each company could has its throw market beca social occasion of its characteristic. (4) In this market, it is important for the brand image, specialized engineering for motion and price. (5) c arer cycle is little(a).(6) stock management and end produce lead times are searing for the success. (7) Main sale steers are department stores, independent distinctive feature retailers, betting goods stores, b awayiques and wholesalers. (8) Most of the firms outsource the manufactures in China. beneath are some characteristics for hectogram and AGI we select to focalise on during the analysisAGIMercuryTar drag CustomerTarget customers are urban and suburban family members aged 25 to 45. Youth market, chief(prenominal)ly 15 to 25. describe statementAmong the first companies to offer fashionable walking, hiking and boating footwear. Its mother company decided to join on the brand by creating complementary moving in of attire. Because of the miserable performance, it was decided to interchange.Stylelogo is marked with prosperous, active and fashion-conscious lifestyle. Its main customers are not interest in its apparel. pecuniary performanceAmong the most profitable firms.Had poor performance after acquisition by WCF.R levelue contribution42% of tax revenue from acrobatic shoes and balance from casual footwear. Revenue and operating income were 470.3 cardinal and 60.4 million in 2006. Re venue and EBITDA were 431.1 million and 51.8 million..Products athletic shoes developed from high-performance footwear to athletic fashion wear. Four main segments mens and womens athletic and casual footwear.Casual shoes focus on mainstream market.In order to stress individual products, it began to monitor styles and images from global kitchen-gardeningFocus on smaller portfolio of important products with longer lifecycles and could maintain simple takings and supply chains.Sales transmit in the first place sold in department stores, specialty retailers, wholesalers and independent distributors. Small percentage is sold through website. Department stores, specialty stores, catalogs, drop retailers and internet.Inventory managementGood at broth management in the industry.Inventory management performance is worse than the sightly level.OutsourceOutsource manufacture in China.Outsource main materials in un fill outn suppliers.Advantages &DisadvantagesIt usurps small size as its competitive disadvantages. And it faced with some problems in the desegregation of manufacturers. Price cuts and promotion in apparel line hurts operating margins but helped to the trainth in sales.Sales egress is impose than the amount because of at that place is pocketable brush off inprice.We could learn that managers of AGI want to lucub estimate the scale of its company and gain bigger market share because of the stable profit margin. And since the revenue is almost the corresponding, it is a good choice to merge with Mercury, which means that revenue would be treble after acquisition.And these deuce companies shit some similar factors, such(prenominal) as (1) They could use the same sale channels after acquisition, and internet channel could be enlarged. (2) They could combine manufacturers to get a powerful bargain in suppliers. (3) The product segments are almost the same, which means that there should be little work to do after acquisition in product adju stment. (4) Thanks to the profitable ability of AGI, it is oft(prenominal) easier to make a better monetary performance of Mercury. (5)It is good for them to increase the performance of neckcloth management if they merge together. (6) Although their target customers are divers(prenominal), especially in ages, which means that style and brand are different in the truly beginning, this factor could change shape into an advantage for the new company could gene set out a fully segment of customers with a wider age ranges.Therefore, take into to a higher place factors into account we guess that Mercury should be an stamp down target for AGI.2. Review the projections formulated by Liedtke. Are they appropriate? How would you recommend modifying them?In the case, we could find that Liedtke used historic cleans to larn the overhead-to-revenue balance. However, historical data is usually bootless for future. Some studies found there is little evidence that firms grew fast cont inued to grow fast in the next bound. And sometimes there are even minus correlations between branch judge in the two terminuss.Besides, smaller firms tend to be much volatile than others, which we could find the same characteristics in these two firms we are talk about. And just as we mentioned in the hesitancy 1, revenue may be doubled afteracquisition, it just fits the theory that it is elusive to maintain historical growth rates as firms double or three-bagger in size. Therefore, plantd on the above analysis, we think that it is not reasonable to use historical data for future projections. And sometimes, psychoanalyst should be better than the historical growth.Considering that there are five main channels for analyst forecasts firm-specific discipline, macroeconomic selective education, information revealed by competitors on future prospects, private information about the firm and public information other than earnings, we think Liedtke could find more informatio n from above channles to get more accurate assumption.And since performance of Mercury is poorer than the mediocre of the industry, it is better to use industry average level for the benchmarking of Mercury when predicting, instead of a discount rate of AGI for example.And from the comparison of 2007 to 2006, we tail end find Liedtkes forecast imply great input from AGI to support the schooling of Mercury, whether he has taken this into consideration? And he estimate debt/ candour ratio remains the same as AGI, that is also unreasonable, for it is not possible to change that in short period.3. Estimate the appraise of Mercury use a discounted cash ladder draw close and Liedtkes base case projections.1first of all, to calculate the cash flows from 2007 to 2011, pull in Income ( detonating device Expenditures Depreciation) Changes in non-cash Working Capital= drop out Cash flow to FirmWe whoremaster get the result.Free Cash flow-17,19226,86721,74025,15829,319(2) hence we need to calculate the endpoint cherish.a. Cost of CapitalFor price of gravid, we know the debt ratio is 20%, and approach of debt is 6%, we need to find the live of equity. We borrow the appeal of equity equal issuing on equity, we tummy calculate the historical return on equity from 2007- 2011 is as below, Return on equity12.8%14.1%14.5%14.8%14.9%We take 14% as reference.Based on the formulaCost of Capital =debt ratio *cost of debt +equity ratio * cost of equity, We can get the cost of Capital in 2012, 12.7%b. growth rate in futureWe can find during the period from 2007- 2011, the growth rate of net income is not stable, so we assume from 2012, Mercury land into stable and slow development stage. And it is demand to calculate the cash flow in 2012. From 2007- 2011, the growth rate ranged from 4.74%- 16.3%, we assume the growth in future forget be not that high. We can find during the period from 2008- 2011, the reinvestment rate 15.57%- 37.1%, we just take a middle on e 24.37%, by multi reinvestment rate and cost of capital (assume cost of capital =return on capital), to reach growth rate afterwards= 3.09%.c. based on the growth rate is 3.09%, we can get EBIT in 2012 is 39,930.. We gull assumed ROC=WACC utmost cling to=EBIT n+1*(1-t)/cost of Capital, we can get Terminal Value in 2011 is 315,237.(3)Present cherish of cash flowsWe have get the cash flows of 2007-2011 and terminal foster in 2011, and the cost of capital is 12.7%, we can get the respective present judge of them and reach the native present value 226,514, which is the estimate Firm value of Mercury.(4) substitute(a) method to calculate cost of capital, then value of Mercurya. of importWe have learnt from Exhibit 3 of peer companies information in this business, we can calculate cost of capital in alternative ways. Unlevered of import for business= of import comparable firms/1+(1-t)(D/E ratio comparable firms) From information provided in Exhibit, we can get average Beta an d D/E ratio, is 1.56, 24.9% respectively. Therefore Unlevered beta for business= 1.35 We know the D/E ratio and tax rate of Mercury, then get levered beta for Mercury =1.52b. adventure unfreeze rate and lay on the line subventionwe assume risk free rate is 5%, and risk premium as the historically one 4.3%. The cost of equity leave behind be 11.5%. Then the cost of capital will be 10.6%.c. inhabit g and terminal value in 2011 anticipate g and terminal value in 2011 will be 2.6% and 374,576 respectively.d. total present value of Mercury entirety value of Mercury will be 247,479, which is the estimate Firm value of Mercury under the alternative method.In my opinion, the value calculated via alternative method will be more reliable.4. Do you go out the value you obtained as conservative or aggressive? Why?I think my valuation is conservative, the reason is as follows (1) infra the underlying method, the expected g is much lower than the average g from 2007-2011, even lower the l owest one indoors this period and the reinvested rate is lower than the average one from 2007-2011 and also not a high one in common business, and we can also found the EBIT valuation account is lower than the average one in that business. (2)(3) Under alternative method, the expected g is much lower as 2.6%, the risk free rate is also a medium one, and the risk premium is a historical one, which is much higher than youthful risk premium in USA.5. How would you poll possible synergies or other sources of value not reflected in Liedtkes base case assumptions?We have conduct some simulation in the spreadsheet, we can find the present value of Mercury is very sensitive to cost of capital, under basic model if the cost of capital curve to 10%, the value will organise up to 304,882. As for debt ratio and expect g, it is not so sensitive, but has some influence. To my surprise, the reinvestment rate is not sensitive to the outcome, I have not figure out the reason. Under the altern ative model, beta, risk free rate and risk premium are all sensitive to the outcome, but not significant as capital in basic model.As for synergy, the management of inventory has not shown great synergic effect to the outcome, for from 2007 to 2011, inventory level has not reduced. I think if AGI can reduce the cost of capital, which will show the great synergic effect to the acquisition.