There are several reasons why AGI should consider Mercury Athletic as an appropriate target for acquisition. First, acquiring Mercury could improve both companies financially. Acquiring Mercury would double AGI’s revenue. Although Mercury’s financial performance has been disappointing, they experienced top line growth of 20% in 2006. Unfortunately, their profitability has been disappointing due to price concessions to big box retailers and an unsuccessful women’s line. Mercury’s (and ultimately AGI’s) profitability could be improved by the synergies of the two companies merging. Synergies within supply chain, operations, research and development, and advertising should all improve Mercury’s EBITDA.

Second, by increasing the size
*…show more content…*

In estimating the value of Mercury we can use a discounted cash flow (DCF) approach or a comparable firms’ multiples analysis. In using the DCF approach we have to make some assumptions in our analysis along with using data generated in the industry and in Liedtke’s projections.

First, the projected cash flows range from $21.2 million in 2007 to $29.5 million in 2011 as shown in the data exhibit ‘DCF model.’ To generate these numbers Liedtke’s base case performance projections are used for the projected 2007 – 2011 net revenue numbers and the estimated depreciation and then his projections for Balance sheet accounts were used to determine the current net working capital and capital expenditure as in the exhibit ‘Financial statements.’ These projections were based by Liedtke under the following assumptions, women’s casual footwear would be wound down within one year and the historical corporate overhead-revenue ratio would conform to historical averages. These annual cash flows give us a PV (Cash flows) of $96.15 million over the next 5 years.

The appropriate discount rate was calculated using WACC formula as shown in the ‘WACC’ exhibit using the following assumptions:

Corporate tax rate would equal 40% based on AGI’s anticipated marginal tax rate

The leverage ratio would be 20%, which was measured by debt divided by the market value of AGI’s invested

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