1 . Is definitely Mercury the right target intended for AGI? How come or why not?
Yes, all of us do think therefore.
In the case, we’re able to find some characteristics of footwear industry: (1) It is just a mature, extremely competitive market marked simply by low expansion, but secure profit margin. (2) Efficiency of individual firms could possibly be quite unstable for they need to anticipate and exploit fashion trend. (3) Other than some global footwear brands, athletic and casual shoes or boots market is nonetheless fragmented, which means each organization could has its market because of its characteristic.
(4) In this industry, it is important pertaining to the brand photo, specialized executive for overall performance and selling price. (5)
Life cycle is short.
(6) Inventory administration and development lead occasions are critical for the accomplishment. (7) Key sale channels are department stores, independent specialty retailers, sporting goods stores, stores and bulk suppliers. (8) The majority of the firms delegate the produces in China and tiawan.
Below are some characteristics to get Mercury and AGI we need to focus on throughout the analysis:
Target consumers are urban and provincial family members aged 25 to 45.
Youth industry, mainly 15 to 25.
One of the primary companies to offer fashionable jogging, hiking and boating shoes. Its mother company decided to extend the manufacturer by creating complementary distinctive line of apparel. Due to poor overall performance, it was chose to sold.
Logo is definitely marked with prosperous, active and fashion-conscious lifestyle. It is main buyers are not interest in its clothing.
Among the most lucrative firms.
Had poor performance after acquisition by simply WCF.
42% of earnings from shoes and equilibrium from everyday footwear. Income and functioning income were 470. a few million and 60. some million in 2006. Revenue and EBITDA had been 431. 1 million and 51. almost eight million..
Athletic shoes developed from top-end footwear to athletic style wear. Several main sectors: men’s and women’s athletic and casual footwear.
Casual shoes give attention to mainstream industry.
To be able to emphasizing individual products, that began to monitor styles and images from global culture
Give attention to smaller portfolio of vintage products with longer lifecycles and could maintain simple creation and supply restaurants.
Mainly bought from department stores, specialty retailers, wholesalers and impartial distributors. Tiny percentage is sold through website. Department stores, specialty stores, catalogs, discount stores and internet.
Good at inventory management on the market.
Inventory management performance is even worse than the normal level.
Outsource make in Cina.
Outsource main elements in foreign suppliers.
Positive aspects &Disadvantages
It will take small size as its competitive disadvantages. And it facing some problems in the debt consolidation of producers. Price cuts and promotion in clothes line affects operating margins but helped to the growth in sales.
Sales progress is lower than the average due to there is very little discount in price.
We could study that managers of AGI want to enlarge the size of it is company and gain larger market share as a result of stable revenue margin. As the income is almost the same, it is a good choice to combine with Mercury, which means that earnings would be doubled after acquisition.
And both of these companies have some similar factors, such as: (1) They might use the same deal channels after acquisition, and internet route could be increased. (2) That they could combine manufacturers to acquire a powerful great buy in suppliers. (3) The product segments happen to be almost similar, which means that there ought to be little operate to do after acquisition in product adjusting. (4) Thanks to the profitable ability of AGI, it is much easier to make an improved financial functionality of Mercury. (5)
It can be good for those to increase the overall performance of inventory management in the event they blend together. (6) Although all their target consumers are different, specially in ages, meaning that style and brand are different in the beginning, this component could develop into an advantage for the new company could have a fully segment of customers with a wider age ranges.
Consequently , take in above elements into account; we think that Mercury should be the right target for AGI.
2 . Review the projections developed by Liedtke. Are they ideal? How do you recommend enhancing them?
In case, we could find that Liedtke employed historical averages to assume the overhead-to-revenue ratio. Nevertheless , historical data is usually worthless for long term. Some research found there is little facts that businesses grew quickly continued to grow quickly in the next period. And sometimes there are even negative correlations between progress rates in the two periods.
Besides, smaller firms are usually more volatile than others, which will we could find the same features in these two firms our company is talking about. And just as we stated in the problem 1, revenue may be bending after acquisition, it really fits the theory that it is challenging to maintain traditional growth prices as companies double or triple in proportion. Therefore , depending on the above research, we think that it is not sensible to use famous data for future predictions. And sometimes, expert should be much better than the historical growth.
Due to the fact there are five main stations for analyst forecasts: firm-specific information, macroeconomic information, details revealed by competitors about future potential customers, private information about the organization and public information other than profits, we think Liedtke could find more information from above channles to get more correct assumption.
As performance of Mercury is usually poorer than the average in the industry, it is best to use industry average level for the benchmarking of Mercury when predicting, instead of a discount charge of AGI for example.
And from the a comparison of 2007 to 2006, we could find Liedtke’s forecast want great suggestions from AGI to support the development of Mercury, if he has taken this kind of into consideration? And he estimate debt/equity proportion remains similar to AGI, that is also unreasonable, for it is not possible to modify that to put it briefly period.
3. Estimate the value of Mercury utilizing a discounted earnings approach and Liedtke’s foundation case projections.
（1）first of all, to calculate the money flows from 2007 to 2011, Net Income
– (Capital Expenditures – Depreciation)
– Changes in non-cash Working Capital
= Free Cash flow to Firm
We can get the effect.
up to 29, 319
(2) then we have to calculate the terminal value.
a. Cost of Capital
For expense of capital, we know the debt ratio is twenty percent, and expense of debt is 6%, we have to find the price of equity. All of us assume the expense of equity equivalent return upon equity, we can calculate the historical go back on equity from 2007- 2011 is just as below, Go back on collateral
14. five per cent
Put into effect 14% since reference.
Based on the formula:
Cost of Capital =debt proportion *cost of debt +equity ratio 2. cost of value, We can get the price tag on Capital news, 12. 7%
b. growth rate in future
We can get during the period from 2007- 2011, the growth rate of net income can be not secure, so all of us assume from 2012, Mercury enter into stable and slow development stage. And it is important to calculate the cash flow this year. From 2007- 2011, the expansion rate ranged from 4. 74%- 16. 3%, we believe the growth in future will be certainly not that excessive. We can get during the period from 2008- 2011, the reinvestment level 15. 57%- 37. 1%, we take a midsection one twenty four. 37%, by multi reinvestment rate and cost of capital (assume expense of capital =return on capital), to reach expansion rate afterwards= 3. 09%.
c. based upon the growth charge is a few. 09%, we can get EBIT this year is 39, 930.. We certainly have assumed ROC=WACC
Terminal Value=EBIT n+1*(1-t)/cost of Capital, we can make Terminal Benefit in 2011 is 315, 237.
(3)Present value of cash moves:
We have get the cash goes of 2007-2011 and fatal value this summer, and the cost of capital can be 12. seven percent, we can get the respective present value of those and reach the total present value 226, 514, which can be the estimation Firm worth of Mercury.
(4) Option method to calculate cost of capital, then benefit of Mercury:
We have learnt from Exhibit 3 of peer companies information with this business, we could calculate cost of capital in alternative ways. Unlevered beta for business= Beta similar firms/[1+(1-t)(D/E ratio comparable firms)] From info provided in Exhibit, we can make average Beta and D/E ratio, is 1 . 56, 24. 9% respectively. Therefore Unlevered beta for business= 1 . thirty five We know the D/E proportion and taxes rate of Mercury, after that get levered beta for Mercury =1. 52
m. risk free level and risk premium
we assume risk free rate can be 5%, and risk superior as the historically a single 4. 3%. The cost of fairness will be eleven. 5%. Then a cost of capital will be 10. 6%.
c. expect g and terminal value this year
expect g and port value this summer will be installment payments on your 6% and 374, 576 respectively.
deb. total present value of Mercury
Total value of Mercury will probably be 247, 479, which is the estimate Firm value of Mercury underneath the alternative method.
In my opinion, the worthiness calculated by means of alternative approach will be more dependable.
4. Will you regard the value you attained as conservative or intense? Why?
I believe my valuation is old-fashioned, the reason is as follows: (1) Underneath the basic approach, the predicted g is much lower than the typical g coming from 2007-2011, even lower the cheapest one within this period as well as the reinvested price is lower compared to the average one particular from 2007-2011 and also not really a high one in general business, and we can also found the EBIT Perimeter is lower compared to the average one in that organization. (2)
(3) Under alternative method, the expected g is much lower as installment payments on your 6%, the chance free rate is also a medium a single, and the risk premium is actually a historical one, which is much higher than latest risk high quality in UNITED STATES.
5. Just how would you analyze possible synergies or other sources of value certainly not reflected in Liedtke’s foundation case presumptions?
We have perform some simulation in the chart, we can get the present value of Mercury is very very sensitive to cost of capital, below basic version if the cost of capital decrease to 10%, the value can rise up to 304, 882. As for debts ratio and expect g, it is not so sensitive, but has some impact. To my personal surprise, the reinvestment price is not sensitive towards the outcome, I use not find out the reason. Underneath the alternative version, beta, risk-free rate and risk premium are all delicate to the result, but not significant as capital in standard model.
Concerning synergy, the management of inventory has not shown wonderful synergic effect to the result, for by 2007 to 2011, products on hand level hasn’t reduced. I believe if AGI can decrease the cost of capital, which will demonstrate great synergic effect to the acquisition.