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Mercury Case - Report - Vedantam Gupta
Mercury Case - Report - Vedantam Gupta
Vedantam Gupta
20152095
BBA-MBA 2015
Corporate Valuation and Restructuring
Analysis of Acquisition of Mercury Athletic by
Active Gear
Industry Overview
The casual footwear industry is mature, but highly competitive industry. There has been low growth, with stable
profit margins. The competition has been competing to anticipate and exploit fashion trends. The casual segment
is mainly based on style, price and general quality. The Athletic segment focuses on brand image, specialized
Engineering for performance and price.
Company Profile
Active Gear
o Demographics
Active Gear is in broad and mainstream market. The company is originally affluent urban and suburban family
members ages between 25 and 45. The product image is prosperous, active and fashion conscious.
o Products
The products of Active Gear have a good brand image. The athletic shoes have a classic image. Also, the casual
shoes have a classic styling. The company has a small portfolio of products with longer lifecycles.
o Distribution
Casual Footwear: The company has 5700 department, specialty and general retail stores. This is via a network of
wholesalers and independent distributors.
Athletic Footwear: The company here follows a different distribution channel. Here they have independent sales
representatives to a limited number of sporting goods stores, pro shops and specialty footwear retailers.
The company also gets its small part of sale from its website.
o Revenue
2006
Mercury Athletic
o Demographics
Mercury Athletic is quite a established company in the footwear industry. The image of the company is
iconoclastic and nonconformist. They target the global youth culture of alternative music, TV and clothing.
o Products
1. Men’s athletic footwear- These products are inexpensive to produce with basic materials used. The
customers pay medium to high prices.
2. Men’s Casual footwear: This segment has products with promising designs but have external forces that
impact this product mainly due to bad weather and strikes, cannibalization of products.
3. Women’s Athletic footwear: This segment has high cost of building brand image and awareness. This
leads to higher marketing and advertising expenses.
4. Women’s Casual footwear: In this segment, the more advertising and marketing is required otherwise the
company will lose its sales volume from this segment.
o Distribution
The main drawback for this company is that there is no one single market that generates a significant amount of
sales, this leads to higher marketing, advertising and distribution cost which in turn hampers the bottom line.
o Revenues
In 2006
If we compare both the companies, we can see that both of them have many differentiating points, which
leads to conclude that they are fundamentally different.
ACQUISITION RATIONALE
Let us analyse weakness/opportunities that Active Gear has and what it aims to generate out of this acquisition.
The firm is small which creates a competitive disadvantage because of the recent consolidation of contract
manufacturers. Also, currently the manufacturers favour the firms that can offer longer production runs.
Since Active Gear is a small brand comparative to its competitors, they cannot use discount retailers due to the
company’s brand image, but this do have consequences which is in this case is the lower sales growth and the
company grew at a rate of 2.2% for the last 3 years.
The first weakness of this company is the lack of reliable manufacturers, which was mentioned above that the
manufacturers stopped production due to bad weather and strikes.
Mercury Athletic has a very poor inventory management. The current daily sales of inventory is 10 days longer
than the industry average. Also, Active Gear has a DSI better than Mercury Athletic.
The third weakness for Mercury is that the company has been facing a decline in operating margins. This is
because of the tradeoff for increase in growth through discounted retailers.
Now if these 2 companies are combined,
Active Gear’s Large Size + Growth Rate and Mercury’s Manufacturer Scrutiny + Inventory System Adoption +
Better Operating Margins.
Valuation
Some of the assumption that were taken as this synergy happens is as follows: -
No cannibalization of products after the merger. There also cannot be significant synergy on the revenues
also.
Further pointing out the revenue synergy. Active Gear can provide Mercury Athletic with a 40% increase
in inventory efficiency. This is based on the previous point mentioned in the company profile. This will
increase the revenue of Mercury by mere 6.7%.
There will be a huge impact on the COGS synergies. This is mainly due to better economies of scale,
better bargaining positions, increased specialization of infrastructure and long production runs
benchmarked at 10%.
So as mentioned in the above point that there will be significant impact on the COGS for mentioned regions. Let
us see in detail
After the merger of these 2 companies’ economies of scale is created in manufacturing due to larger size, this will
additional savings by providing larger production runs to the manufacturers. In the distribution also economies of
scope are created by increasing size of the distribution network and resilience as well as reaching larger target
audience.
2. Growth Potential
Since Active gear gains exposure to growing historically in discount retail space through Mercury’s product
line without compromising core Active Gear Product. Mercury Athletic gains improved inventory
management and efficiency but retains autonomous status outside merged production lines and logistics.
Acquisition Risks
Conclusion
Assumptions
Assumptions Values
Sales Growth 12.75%
CGS 57.02%
SGA 31.42%
Depreciation/NET ppe t-1 27.26%
Cash 3.90%
A?R 9.99%
Inventory 17.48%
PPE/sales 8.67%
AP/sales 3.94%
accruals/sales 4.77%
Tax Rate 40%
Long-run growth 2.84%
Synergy Assumptions
Current Day Sales Inventory 63.79
Target Day Sales Inventory 42.1
$380,000
DCF Valuation Summary
$370,000
$360,000
Valuation as is using
$350,000 Historical Information
Valuation using case
$340,000 projections
Valuation including
$330,000 synergies
$320,000
$310,000
1
$600,000
Valuation Comparison
$500,000
$-
1
$50,000
$45,000
Premium Comparison
$40,000
$35,000
$30,000 Premium based on
$25,000 historical