Mercury Athletic Case Essay

1428 Words Oct 3rd, 2011 6 Pages
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
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To calculate the terminal value, a 3% growth rate was assumed based on historical U.S. inflation. This results in a terminal value of $276,921,000 (Cash flows in year 1 / Rate – Growth). The purchase price of the acquisition ($157,290,000) was estimated using the price per earnings ratio of a comparable company in the footwear industry given in case Exhibit 3. The price per earnings ratio was then applied to the 2006 Mercury net income. The price per earnings ratio was used because it is the most accurate reflection of the market’s view of Mercury Athletic. Surfside Footwear’s price per earnings was used as the comparable company because it has a 9.3% EBIT margin, which is equivalent to Mercury’s 2006 EBIT margin. The value of the acquisition ($336,361,000) minus the purchase prices ($223,583,000) yields a net present value of $112,778,000 (See Exhibit 1).
Synergies could be realized after the acquisition. By adopting Active Gear’s inventory system, this will reduce the Days Sales Inventory (DSI) from 60 to 42.5, adding potential value to the acquisition. If Mercury women’s casual line turns around with the adoption of Active Gear’s inventory system it has the potential to increase revenue growth by 3% and EBIT by 9%. If this were to occur, Active Gear could reap the rewards financially. However, even

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