Mercury Athletic Footwear – Valuing the Opportunity

Mercury Athletic Footwear – Valuing the Opportunity

Introduction:

Active Gear, Inc is looking forward to acquiring Mercury, which is currently a part of West Coast Fashions, Inc. The analysis focuses on Is Mercury an appropriate target for AGI. If yes, what should be the bidding price.

Industry background:

Footwear industry is highly competitive with low growth. Different brands compete in style, price and quality in casual footwear segment. Companies mainly focus on their efficiency in production for superior product and loyal customer base who believes in their brand. Firms rarely sell their product through company retail store. Most of the sales are through departmental stores, sporting goods stores, wholesaler etc. Online platform is also considered as emerging market for sales. On average, it takes 8-10 months for new design to get production ready and then another 4-6 months before new orders are filled. This makes it very important to manage the inventory actively and efficiently to reduce DSI.

Fundamentals comparison:

- AGI’s demographical target is affluent urban and suburban family members (age 25 to 45) whereas Mercury focuses on youth market (15 to 25 age) with active interest in extreme sports.

- AGI’s portfolio include athletic/casual shoes with classic image and styling having longer lifecycles. Mercury’s products include Men’s athletic (Inexpensive COGS, loyal customers), Men’s Casual (promising designs but cannibalization issues), Women’s athletic footwear (high cost of building brand image), Women’s casual footwear (Loss incurring segment)

- AGI’s product prices are from medium to high whereas Mercury sells low/medium priced products.

AGI as a bidder & Mercury as acquiree:

- AGI is comparatively small size firm with low leverage (100M) compared to average footwear firm’s leverage of 135M. AGI is not able to use discount Big Box retailers due to its brand image, because of which its sales growth is stalled from 2004-2006 and now it needs earnings boost. AGI has stronger profitability margins and inventory management of 42.5 DSI compared to 51 average industry DSI but currently, manufacturers are favoring firms who could offer longer product runs. So, it is right for AGI to expand the firm to gain competitive advantage.

- Mercury faced stalled revenue growth due to discount retailers. Also, it has a very poor inventory management of 60 DSI which is 10 days longer than average industry. It needs reliable manufacturers who can deliver products on time in good condition.

Acquisition consideration and concern:

- AGI can gain exposure to discount retail space through Mercury’s product line without compromising its brand value and gain from boosted revenue. And Mercury can gain from improved inventory management and efficiency. Economies of scales in manufacturing due to large firm size after merger can benefit from additional savings on long run orders to Chinese manufacturers. It will have broadened customer base and customer demographics.

- Mercury’s underperforming women’s casual line can be problematic if not handled well. Combination of two brands might result in company image clashes and can be difficult to manage.

Projections by Liedtke:

In his analysis, Liedtke used historical averages to compute the future projections. However, if two firms are merged the synergies may increase the revenue and decrease the costs. The synergies include no cannibalization of products,