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Mercury Athletic Case Study

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John Liedtke, the head of business development for Active Gear, Inc. (AGI), a privately held footwear company, is faced with a potential acquisition opportunity. West Coast Fashions, Inc. (WCF) has decided to strategically reorganize its company, and one of the divisions it intends to shed is Mercury Athletic (MA), its footwear division. Lietdtke knows that acquiring Mercury Athletic would roughly double Active Gear’s revenue, increase its leverage with contract manufacturers, and expand its presence with key retailers and distributors. Before hearing the pitch from Active Gear’s bankers on a possible bid, Mr. Lietdke wants to do his own evaluation of Mercury Athletic first. From a qualitative perspective, MA is an appropriate target for AGI. There are some advantages that AGI should consider for the acquisition of MA. AGI will obtain more product diversification, technology advancement, and a larger distribution channel. That being said, Mr. Liedtke needs to figure out an estimated valuation for an expected bid offer. The valuation techniques that can be used for the acquisition of MA is the discounted cash flow (DCF) method while also looking at comparable metric ratios across the industry. Some comparable metrics that Lietdke could analyze for MA to compare across the industry are P/E, EV/EBIT, and EV/EBITDA. Lietdke should also be aware of potential problems associated with the DCF strategy. The problems outlined in chapter 9 include, the typical investment opportunity has a finite usually brief life, while the life expectancy of a company is indefinite, the typical investment opportunity promises stable or perhaps declining cash flows over time, while the ability of a company to reinvest earnings customarily produces a growing cash flow, and the cash flows from a typical investment belong to the owner, while the cash flows generated by the company go to the

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