Mercury Athletic Case
Executive Summary
The footwear industry is highly competitive industry with fairly stable profit margins. Active Gear is a profitable firm in the industry; however Active Gear is a smaller firm than many other competitors and its small size is becoming a competitive disadvantage. The rise of large retailers has also endangered Active Gear’s growth.
Mercury Athletic Footwear designs and distributes athletic and casual footwear dominantly to the youth market. Mercury competes in four main product lines: men’s and women’s athletic and casual footwear. Men’s athletic footwear is the leading product for Mercury Athletic. Women’s casual footwear is Mercury’s worst performing product and post-acquisition the line may be discontinued by Active Gear. The acquisition of the Mercury Athletic division has sources of potential including an increase in Active Gear’s revenue, an increase in leverage with contract manufacturers, boosting capacity utilization and expanding its presence with retailers and distributors.
Upon the review of the opportunity to acquire Mercury Athletic Footwear, the results of the financial analysis below indicate Active Gear should proceed with the acquisition. Based on the Free Cash Flow Method, considering the financial projections and assumptions for Mercury Athletic, indicate the acquisition has a positive net present value of $112,778,000 [Present Value of Future Cash Flows (59,440,000) + Terminal Value ($276,921,000) – Purchase Price ($223,583,000)]. There are also possible synergies that could make the project even more financially favorable, which are discussed below in the analysis. Introduction John Liedtke, the head of business development for Active Gear, Inc. is responsible for developing the financial projection for the acquisition of Mercury Athletic. Below is a summarized comparison of Active Gear and Mercury Athletics’ current operations: | Active Gear, Inc. | Mercury Athletic | 2006 Revenue | $470 million |
The footwear industry is highly competitive industry with fairly stable profit margins. Active Gear is a profitable firm in the industry; however Active Gear is a smaller firm than many other competitors and its small size is becoming a competitive disadvantage. The rise of large retailers has also endangered Active Gear’s growth.
Mercury Athletic Footwear designs and distributes athletic and casual footwear dominantly to the youth market. Mercury competes in four main product lines: men’s and women’s athletic and casual footwear. Men’s athletic footwear is the leading product for Mercury Athletic. Women’s casual footwear is Mercury’s worst performing product and post-acquisition the line may be discontinued by Active Gear. The acquisition of the Mercury Athletic division has sources of potential including an increase in Active Gear’s revenue, an increase in leverage with contract manufacturers, boosting capacity utilization and expanding its presence with retailers and distributors.
Upon the review of the opportunity to acquire Mercury Athletic Footwear, the results of the financial analysis below indicate Active Gear should proceed with the acquisition. Based on the Free Cash Flow Method, considering the financial projections and assumptions for Mercury Athletic, indicate the acquisition has a positive net present value of $112,778,000 [Present Value of Future Cash Flows (59,440,000) + Terminal Value ($276,921,000) – Purchase Price ($223,583,000)]. There are also possible synergies that could make the project even more financially favorable, which are discussed below in the analysis. Introduction John Liedtke, the head of business development for Active Gear, Inc. is responsible for developing the financial projection for the acquisition of Mercury Athletic. Below is a summarized comparison of Active Gear and Mercury Athletics’ current operations: | Active Gear, Inc. | Mercury Athletic | 2006 Revenue | $470 million |