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Mercury Athletic Case

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Mercury Athletic Footwear: Valuing Opportunity
Case Summary: John Liedtke, head of business development for Active Gear Inc. (AGI), is evaluating the acquisition of Mercury Athletic (Luehrman & Hielprin, 2009). Both companies compete in the footwear industry which is a highly competitive industry characterized by low growth and stable profit margins (Luehrman & Hielprin, p. 1). Liedtke’s initial assumptions was that the acquisition of Mercury Athletic would double AGI’s revenue, increase its leverage with manufacturers and expand its distribution. In order to evaluate these assumptions and determine if the acquisition would be a good decision, Liedtke generated pro forma income from Mercury’s four main segments and key balance sheet account for the years spanning 2007 through 2011. In preparing these, he made the following assumptions: • Mercury’s women’s casual footwear would be merged with AGIs within the first year. • Overhead to revenue ratio would conform to historical averages • Capital structure would follow AGI post acquisition • Discount rate was calculated using AGI’s leverage and tax rate Additionally, he was counting on synergies between the two companies with respect to inventory management and the women’s casual footwear line. Using this information, he calculated projected EBIT margin of 9% and revenue growth of 3%.
Case Questions:
a. Is Mercury an appropriate target for AGI? Why or why not? According to Liedtke, Mercury is targeted for three primary reasons; double AGI’s revenue, increase leverage with manufacturers, and expand its distribution. In order to see if AGI and Mercury are compatible with respect to those primary reasons, we will apply some initial screening criteria outlined in table 1 below (DePamphilis, p.178):
Table 1
|Target Criteria |AGI…...

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