Mercury Athletics Footwear: Corporate Valuation - Essay Example

? Mercury Athletics Footwear: Corporate Valuation Introduction Following the information provided in the case study, here is the calculation of the value of Mercury Athletic Footwear as an independent firm using the free cash flow method. Free cash flow analysis is the most suitable method of determining a possible acquisition. The analysis and calculations regarding the present value of Mercury Athletic Footwear are shown. I have attached the workings in an excel document. Value of Mercury Athletic Footwear 2007 2008 2009 2010 2011 1 2 3 4 5 Revenue 479,329.00 489,028.00 532,137.00 570,319.00 597,717.00 Less: Cost of Revenue 423,837.00 427,333.00 465,110.00 498,535.00 522,522.00 Less: SA&A 8,487.00 8,659.00 9,422.00 10,098.00 10,583.00 Operating Earnings 47,005.00 53,036.00 57,605.00 61,686.00 64,612.00 Add Depreciation & Amortization 9,587.00 9,781.00 10,643.00 11,406.00 11,954.00 EBIT 56,592.00 62,817.00 68,248.00 73,092.00 76,566.00 Less 40% Cost Saving (Tax) 18,802.00 21,214.40 23,042.00 24,674.40 25,844.80 Capital Expenditure 11,983.00 12,226.00 13,303.00 14,258.00 14,943.00 Changes in working capital 4,569.00 2,648.00 9,805.00 8,687.00 6,234.00 Net Cash Flow 21,238.00 26,728.60 22,098.00 25,472.60 29,544.20 Terminal value Discount Factor 12% Growth rate (2%) Present Value of Net Cash Flow $18,963 $21,308 $15,729 $16,188 $16,764 Present Value of All Cash Flows (A) $88,952 Terminal Value: 2012 Net Cash Flow $30,135 2011 Present Value $301,351 2007 Present Value (B) $170,995 Value of Mercury = A+B $259,946         Considering Mercury from 2007–2011, there is growth in earnings and using the free cash flow method it is evident that the Net profit value is positive. Additionally, acquiring Mercury may lead to large market share which may eventually result into huge revenue. Using a discount rate of 12% seems healthy because it takes into consideration issues of risks and inflation which may interfere with the business operations in future. Any discount rate below that may mean less risks and inflation making it riskier when something happens to the expected income in future. Otherwise, concerning growth rate, I used 2% as per John’s decision (Luehrman & Heilprin, 2009, p. 1-14). 2 By analyzing the information provided in 2006 just before AGI plans of acquisition, it is clear that Active Gear has higher revenues of $470,286 million while Mercury athletics’ revenue is $ 431, 121millionrepectively. Looking at the operating income, Active Gear enjoys $60.4 while Mercury Athletic has $42.299 operating incomes respectively. Additionally, the revenue growths for the two companies are provided as 2-6% for Active Gear and 12.5% for Mercury respectively. This information is vital in negotiation and therefore John will use them while negotiating for acquisition of Mercury athletic (Luehrman & Heilprin, 2009, p. 1-14). . Just by considering the general performance of the two business entities, Active Gear, Inc. has enough capabilities to acquire Mercury Footwear due to AGI’s high revenue and operating income. Percentage difference in revenue between the two companies may be used by John as representing the lack in both the companies. Acquisition may mean that Mercury’s revenue will improve because they will be operating on the wings of AGI whose revenue is already high. The acquisition of Mercury Athletic Footwear would offer a good competitive advantage to AGI due to the competition that exists in athletic and casual footwear industry (Luehrman & Heilprin, 2009, p. 1-14). It is apparent that AGI will gain a bigger size and increases her growth as short as possible thereby increasing her leverage as a result of wide contract manufactures in China and client base. Furthermore, there are benefits that accrue due to economies of scale by making the company more powerful while negotiating contracts. GI makes more profit and revenues in the industry more than Mercury hence giving AGI an advantage over Mercury. Acquisition would therefore mean that there would be an increase in the revenues and profit by utilizing synergies. There would also be a forecasted increase in consolidated income from $479.3 million to $597.7 million in Mercury if is acquired by AGI. Expected increase in income is attributed to projected growth of Men’s casual footwear section’s sales when Mercury is acquired by AGI. It is assumed t5hat perhaps the management of the company would sustain EBIT Margins at 13% for men’s athletic and 16% for men’s casual footwear which Liendke’s believes that would eventually increase EBIT by 9% as compared to the average industry level of 10%. In addition, AGI would be in a better negotiating position by introducing Mercury Athletic Footwear to their inventory management system that can help improving higher than average Days sales in inventory numbers (Luehrman & Heilprin, 2009, p. 1-14). It is clear from the financial statements such as a strong operating margin that AGI has growth prospects even when they acquire another company such as Mercury. Mercury Athletics Footwear has not been doing very well especially in Women’s footwear and therefore acquisition may enable it widen her markets and eventually boost the sales of her slow moving inventories. John should also state in his negotiation that by acquiring Mercury Athletic Footwear, there shall be no future risk as per the computation because all the future cash flows will be positive (Luehrman & Heilprin, 2009, p. 1-14). John should convince Mercury management that acquisition would reduce level of competition in the industry and further lead to diversification of products. Moreover, acquisition will boost growth of distribution channels as well improving technology in operations due to diversification of mixed technology from both companies. Also, AGI has a positive working capital of $109, 888 which is obtained after subtracting their total current liabilities of $80,767 from their total current assets of $190,655. Positive working capital means that they are able to settle their short term obligation thus showing how successful AGI is in generating cash. Positive working capital would further mean that AGI can use the amount in paying for the acquisition (Luehrman & Heilprin, 2009, p. 1-14). 3A In adopting the tactic by Active Gear of outsourcing labor in cheap labor countries in Asia and selling the products in USA may benefit both the countries in various ways. For Instance, USA will gain much from such kind of transaction because the company will be taxed in USA where it was incorporated. All the revenues attributed to Active Gear are subjected to the US Corporation tax thus boosting the economy of the country. There may also be other social responsibility programs initiated by Active Gear in US (Rolstada?S, Henriksen & O'sullivan, 2012, p. 29-40). US people will benefit from Active Gear products because of their availability in the market unlike the Asian countries where the products may not even reach. In fact, selling products to Asian countries may be costly because of transportation costs. Outsourcing may help US people through production of high quality products with cheap labor which may be translated into cheap product prices for the locals. Outsourcing may also provide a good way for US to interact with other diverse Asian culture and learn from them hence getting a feel of new market in the foreign countries (Rolstada?S, Henriksen & O'sullivan, 2012, p. 29-40). On the other hand, Asian countries have significant number of job hungry workers who are also a threat to the economy in terms of increased crime. Availability of jobs in America may therefore act as a relieve to the larger jobless population in these countries. This is very essential in gaining foreign knowledge about development of certain products such as footwear in Active Gear. It is therefore possible for the foreigners to start off projects in their respective countries that can help boosting their economy (Lazonick, 2009, p.5-20). This phenomenon is known as reverse brain drain since the foreigners are likely to even pursue rewarding job openings offered by American companies in their countries. Generally America may lose in outsourcing cheap labor from Asian countries because the American workforce will be forced to compete for low wage workers from the poor countries. This really hurts the American economy by taking the citizen’s jobs to foreigners (Rolstada?S, Henriksen & O'sullivan, 2012, p. 29-40). B Although, outsourcing manufacture may provide substantial cost saving, the question is the sustainability of cost saving. It may be hard to ascertain whether manufacturing company’s outsourcing jobs have indeed increased their profits due to low cost or increased cost with low profit. Cost of outsourcing is normally very expensive at long run but most companies only consider short run cost savings which really harms the shareholders (Rolstada?S, Henriksen & O'sullivan, 2012, p. 29-40). Outsourcing may have a very bad implication on towards the public thus interfering wither reputation. Most locals may not buy from a company that outsources labor because they may feel that the company does not provide them with jobs. High number of unemployed people may cry foul of an industry outsourcing manufacture by stating that the company does not look unto her citizens’ welfare. As a result, a company outsourcing may lose customers in the long run and even be subjected to restrictions by the government (Lazonick, 2009, p.5-20). C Outsourcing has affected more than just manufacturing and the effects range from human rights violations to issues regarding standard of living. It is worth noting that despite reducing cost of production, there is reduced employment rates both locally thus leading to high unemployment (Lazonick, 2009, p.5-20). A country affected by outsourcing decision which has high unemployment level will be forced to pay their unemployed citizens their unemployment benefits which is really hurting the economy. Moreover outsourcing manufacture may lead to a low quality product because perhaps it may be hard to regularly inspect the progress of work done. It may not be easy to address work related issues and the product quality issues from a far distance. References Lazonick, W 2009, Sustainable Prosperity In The New Economy?: Business Organization and High-Tech Employment In The United States, Kalamazoo, Mich, W.,E, Upjohn Institute For Employment Research. Luehrman, & Heilprin, J, L 2009, Mercury Athletic Footwear Valuing the Opportunity, Boston, Massachusetts, Harvard Business Publishing. Rolstada?S, Henriksen, & O'sullivan, D 2012, Manufacturing Outsourcing a Knowledge Perspective, London, Springer, Http://Dx.Doi.Org/10.1007/978-1-4471-2954-7. Read More