ASSIGNMENT SUBMISSION FORM Member Name PG ID Ranjit Mahendra Jha 81700266 FSCV – Term 4 Mercury Athletic Case 1. IsMercury an appropriate target for AGI? Why or why not? · Mercury is an appropriate target. Mercury hasbusiness moat in designing and selling through various distribution channelsand it is an appealing brand to youth.
· Mercury will bring synergies to the AGI and willgive them expertize and diversification in newer sports division. Mercury alsooperates on asset light model and is not averse to trends. 2.
Reviewthe projections formulated by Liedtke. Are they appropriate? How would yourecommend modifying them? · Liedtke has done basic spreadsheet sensitiveanalysis, which is not useful for long term projections & analysis of thecompanies. Every industry is different and we cannot measure everything by sameyard stick. · These kind of projection requires top downapproach. Overall economy, industry performance, supply chain, distribution,in-depth analysis of various divisions, modification in process, capex, Brandvalue, geographies, etc.
· Professional investment consultant, Independentanalysts, etc. to be used for evaluation of the business. Thesis should bewritten on why to make this investment.
Comparable to be used. Empriricalstudies of such acquisition to be evaluated.3. Estimatethe value of Mercury using discounted cash flow approach and Liedtke’s basecase projections.
Valuing the company on base case by using discount rate of 7.5%,referring to exhibit 6& 7 and long term revenue growth of 3% & EBITmargin of 9%.The Free cash flow model gives value of $ 530,238. Workingattached with the excel sheet.
4. Doyou regard the value you obtained as aggressive or conservative? Why? · First of all Liedtke has not used the scientificapproach of using top down analysis of the company and second, he has notevaluated nor has he considered Mercury brand value and top line growth between2004-2006 which has been around 18% CAGR, pre WCF acquisition.· Post WCF acquisition, WCF tried to give morediscount in order to promote Mercury and also reduce inventory levels; thispromotion resulted in decline of operating income and net income margins.
· Mercury underlying business has been very strongand popular among global youth and Mercury business had delivered the value.Liedtke has projected the business at about 4-5% top line growth which is veryconservative. 5. Howwould you analyse synergies or other sources of value not reflected inLiedtke’s base case assumptions? · Liedtke’s assumption in valuing the business hasbeen conservative and he has measured this only in terms of accountingvaluation.· The prime objective of AGI for acquisition wasthey were doing well in the past but their growth rate has been much belowtheir historic growth rates.
AGI growth rate was shrinking and in particular inearly 2000 where competitors were getting big and AGI was obviously becomingsmall. By acquiring Mercury, AGI will be able to the following. · Mercury was a strong athletic and sports brandand is popular among youth.Mercury brand will not only bringeconomies of scale but also economies of scope as Mercury will add to existingcapacity utilization for AGI.
· Mercury has bandwidth and expertise to scalewith asset light model and does not require major capex expenditure. · Bringing synergies to distribution of AGI andMercury distribution and also increasing the negotiating strength with keysuppliers in China and Asian production hubs. · Lastly, the investors and analyst community willvalue AGI with Mercury on the grounds of their expertise, Brand Values andsize. AGI will get better valuation in terms of raising money from investors orbank & probably higher quality credit rating. Sources – PDF, Exhibits spread sheets provided for theproject.