...1 The Value of Synergy Aswath Damodaran Stern School of Business October 2005 2 The Value of Synergy Many acquisitions and some large strategic investments are often justified with the argument that they will create synergy. In this paper, we consider the various sources of synergy and categorize them into operating and financial synergies. We then examine how best to value synergy in any investment and how sensitive this value is to different assumptions. We also look at how this synergy value should be divided between the parties (or companies) involved in the investment. We conclude with an empirical examination of how much synergy is actually created in corporate mergers, and how much is paid. Synergy, we conclude, is so seldom delivered in acquisitions because it is incorrectly valued, inadequately planned for and much more difficult to create in practice than it is to compute on paper. 3 When Carly Fiorina argued for Hewlett-Packard’s acquisition of Compaq, she offered a number of of reasons the deal made sense. She noted that the combined company would be able to meet the demands of customers for “solutions capability on a truly global basis.” She also claimed that the firm would be able to lead with its products “from top to bottom, from low end to high end.” As her crowning argument, she claimed that the merger made sense because it would create “synergies that are compelling.” Synergy, the increase in value that is generated by combining two entities...
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...was Mercury Athletic Footwear. WCF wanted to dispose off this segment. They just wanted to divest because they wanted to focus more on their core business and move it up to the elite class. John Liedtke was the Business Development Head at that time in Active Gear Inc. He had a clear idea that acquiring Mercury will shoot up AGI’s revenues for sure. It would also ensure an expansion of the key business. In order to get a clearer picture on the acquisition, he needed to compare and analyze the company’s financials well. By this he could gauge the pros and cons of this acquisition. Are the strategic reasons behind the Merger good enough? Explain As a team, we had different views on this question. Some reasons make us think that it may be beneficial for AGI to grab the opportunity but some make us think that it might not be as promising as it seems. Let us see why we feel it is a good idea for AGI to acquire Mercury. Active Gear Inc. Mercury Athletic Footwear Revenue $470,285mn $431,121mn % Revenue Product wise 42% Athletic 58% Casual 79% Athletic 21% Casual Operating Income $60.4mn $42,299mn Revenue growth 2% to 6% 12.5% Active Gear was one of the most successful firms in terms of profitability, in the footwear industry. Mercury looked like a good opportunity for an attractive investment because they almost have the same revenues, while being smaller in size, in the market. The Percent revenue in the casual footwear in AGI compensates for the gap in Mercury. It’s...
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...2009 TIMOTHY A. LUEHRMAN JOEL L. HEILPRIN Mercury Athletic Footwear: Valuing the Opportunity In March 2007, John Liedtke, the head of business development for Active Gear, Inc., a privately held footwear company, was contemplating an acquisition opportunity. West Coast Fashions, Inc. (WCF), a large designer and marketer of men’s and women’s branded apparel had recently announced plans for a strategic reorganization. The plan called for a divestiture of certain non-core assets and a renewed focus on WCF’s higher-end business, business-casual, and formal-wear apparel businesses. One of the divisions WCF intended to shed was Mercury Athletic, its footwear division. Liedtke knew that acquiring Mercury would roughly double Active Gear’s revenue, increase its leverage with contract manufacturers, and expand its presence with key retailers and distributors. He also expected that Active Gear’s bankers would quickly approach the company about a possible bid for Mercury; consequently, he wanted to complete his own rough evaluation of the opportunity before hearing the bankers’ pitch. Athletic and Casual Footwear Industry Footwear was a mature, highly competitive industry marked by low growth, but fairly stable profit margins. Despite the industry’s overall stability, the performance of individual firms could be quite volatile as they vied with one another to anticipate and exploit fashion trends. The market for athletic and casual shoes remained fragmented, despite...
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...Mercury Athletic Footwear: Valuing Opportunity Case Summary: John Liedtke, head of business development for Active Gear Inc. (AGI), is evaluating the acquisition of Mercury Athletic (Luehrman & Hielprin, 2009). Both companies compete in the footwear industry which is a highly competitive industry characterized by low growth and stable profit margins (Luehrman & Hielprin, p. 1). Liedtke’s initial assumptions was that the acquisition of Mercury Athletic would double AGI’s revenue, increase its leverage with manufacturers and expand its distribution. In order to evaluate these assumptions and determine if the acquisition would be a good decision, Liedtke generated pro forma income from Mercury’s four main segments and key balance sheet account for the years spanning 2007 through 2011. In preparing these, he made the following assumptions: • Mercury’s women’s casual footwear would be merged with AGIs within the first year. • Overhead to revenue ratio would conform to historical averages • Capital structure would follow AGI post acquisition • Discount rate was calculated using AGI’s leverage and tax rate Additionally, he was counting on synergies between the two companies with respect to inventory management and the women’s casual footwear line. Using this information, he calculated projected EBIT margin of 9% and revenue growth of 3%. Case Questions: a. Is Mercury an appropriate target for AGI? Why or why not? According to Liedtke, Mercury is...
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...Mercury Athletic Footwear: Valuing the Opportunity Merger and Acquisition Assignment * Is mercury an appropriate target for AGI? Why or Why not? The footwear industry is highly competitive industry with fairly stable profit margins. In this industry, players compete on basis of style, price and quality. Success factors are active management of inventory and production. Active Gear is a profitable firm in the industry; however Active Gear is a smaller firm than many other competitors and its small size is becoming a competitive disadvantage. The rise of large retailers has also endangered Active Gear’s growth. Mercury Athletic Footwear designs and distributes athletic and casual footwear dominantly to the youth market. Mercury competes in four main product lines: men’s and women’s athletic and casual footwear. Men’s athletic footwear is the leading product for Mercury Athletic. Women’s casual footwear is Mercury’s worst performing product and post-acquisition the line may be discontinued by Active Gear. The below table lists some financial and other aspects of both firms: | Active Gear Inc | Mercury Athletic | Financial Aspect: | Revenues | $470,286 M | $431,121 m | % of Revenue Product | 42% Athletic58% Casual | 79% Athletic21% Casual | Operating Income | $60.4 m | $42,299 m | Revenue Growth | $2-6% | 12.5% | DSI (Days Sales Inventory) | 42.5 | 62.2-10 days more than industry | Other Aspects: | Demographical Target | Family members | Youth...
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...Mercury Athletic Footwear: Valuing the Opportunity Team 10 / Mergers and Acquisitions West Coast Fashions, Inc (WCF) was a large business, which dealt with men’s and women’s apparel. One of their segments was Mercury Athletic Footwear. WCF wanted to dispose off this segment. They just wanted to divest because they wanted to focus more on their core business and move it up to the elite class. John Liedtke was the Business Development Head at that time in Active Gear Inc. He had a clear idea that acquiring Mercury will shoot up AGI’s revenues for sure. It would also ensure an expansion of the key business. In order to get a clearer picture on the acquisition, he needed to compare and analyze the company’s financials well. By this he could gauge the pros and cons of this acquisition. Are the strategic reasons behind the Merger good enough? Explain As a team, we had different views on this question. Some reasons make us think that it may be beneficial for AGI to grab the opportunity but some make us think that it might not be as promising as it seems. Let us see why we feel it is a good idea for AGI to acquire Mercury. | |Active Gear Inc. |Mercury Athletic Footwear | |Revenue |$470,285mn |$431,121mn | |% Revenue Product wise |42% Athletic 58% Casual ...
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...1. Mercury is properiate for AGI as long as AGI could acquire by a price not much higher than Mercury’s true intrinsic value. According to Liedtke’s analysis, this acquisition will almost double AGI’s size, which would give it some competitive advantages in both operating and financing. Additionally, according to table 2 and Ex1, AGI and Mercury have an exactly same operating metrics, including RONA, ROE, and Asset Turnover during the past three years, which also makes Mercury a proper target. Except for Women’s Casual Footwear division, which will be closed in one year after acquisition, the other three of Mercury all demonstrate a prosperous future prediction in margins and growth. 2. As shown in Appendix, Net Income Margin, NWC as % of Revenue, and Depr. as % of PPE projected by Liedtke maintains stable and reasonable, compared with both the industry average and Mercury’s previous performance. Specifically, revenue growth rate will drop by a large degree in 2008 for the reason that AGI plan to shut down the business of Women’s Casual Footwear. It is still reasonable because EBIT margin and other ratios will be stable and close that business will not hurt the business as a whole. However, the EBIT and EBITDA Margin are recommended to be lower than the projection because Mercury got most of its sales from discount promotions, and it is suggested to keep this strategy, which may lower down the margins. 1. 2. 3. 1. Projected Cash Flow is shown in appendix. The...
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...Case Project Case # 1: Valuation “ Mercury Athletic Footwear : Valuing the Opportunity” FIN 321 Dr. Ghosh Edward Pinela Adriana Nava Kristie Tillett Grace Tung Zhibin Yang Mercury Athletic Footwear 1. Is Mercury an appropriate target for AGI? Why or why not? There is sufficient evidence to suggest it will be advantageous for AGI to acquire Mercury Athletics. Factored into the decision is the lack of information on the work culture both firms currently possess. Culture is important, because if the cultures drastically differ, it could possibly inhibit efficiency and effectiveness of strategic planning. If one culture empowers employees, while the other gives very limited power to employees to make decisions, the other group will be forced to change. Change is often difficult and is viewed negatively by the employees forced to change. The team still believes there is adequate information from the financial statements and forecasting, that acquiring Mercury is appropriate. Both firms strive in opposing target markets and since the markets differ so greatly, AGI should not experience a measurable amount of cannibalism. Diagram 1 displays revenue and the market advantage of each company. The revenues are comparable, and through the acquisition, they will have more leverage with producers. 2. Review the projections formulated by Liedtke. Are they appropriate? How would you recommend modifying them? The biggest assumption in this model...
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...Case Project Case # 1: Valuation “ Mercury Athletic Footwear : Valuing the Opportunity” FIN 321 Dr. Ghosh Edward Pinela Adriana Nava Kristie Tillett Grace Tung Zhibin Yang Mercury Athletic Footwear 1. Is Mercury an appropriate target for AGI? Why or why not? There is sufficient evidence to suggest it will be advantageous for AGI to acquire Mercury Athletics. Factored into the decision is the lack of information on the work culture both firms currently possess. Culture is important, because if the cultures drastically differ, it could possibly inhibit efficiency and effectiveness of strategic planning. If one culture empowers employees, while the other gives very limited power to employees to make decisions, the other group will be forced to change. Change is often difficult and is viewed negatively by the employees forced to change. The team still believes there is adequate information from the financial statements and forecasting, that acquiring Mercury is appropriate. Both firms strive in opposing target markets and since the markets differ so greatly, AGI should not experience a measurable amount of cannibalism. Diagram 1 displays revenue and the market advantage of each company. The revenues are comparable, and through the acquisition, they will have more leverage with producers. 2. Review the projections formulated by Liedtke. Are they appropriate? How would you recommend modifying them? The biggest assumption in this model...
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...assigned prior to the presentation day. Presenting a case involves summarizing the case, answering the questions, and leading a class discussion for the case based on the questions. Please do not change groups during the semester. Peer Evaluations: To prevent free-riding, I will ask that each group member fill out a confidential peer evaluation report by the end of the course. You should use the form to outline each team member’s contribution (excluding your own). Failure to submit an evaluation will result in a penalty of your overall grade. Case #1: Financial Institutions/Intermediaries; Corporate Governance “The Role of Capital Market Intermediaries in the Dot-Com Crash of 2000” Case #2: Valuation “Mercury Athletic Footwear: Valuing the Opportunity” Case #3: Capital Budgeting “Tokyo Disneyland and the DisneySea Park: Corporate Governance and Differences in Capital Budgeting Concepts and Methods Between American and Japanese Companies” Case #4: Cost of Capital “Lex Service PLC - Cost of Capital” Case #5: Dividend Policy “Dividend Policy at FPL Group, Inc....
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...are a university that lives by three words: challenge, innovate and connect. You have chosen a university known for how it helps students meet the challenges of the future. We have created a leading-edge, technology-enriched learning environment. We have invested in state-of-the-art research and teaching facilities. We have developed industry-ready programs that align with the university’s visionary research portfolio. UOIT is known for its innovative approaches to learning. In many cases, our undergraduate and graduate students are working alongside their professors on research projects and gaining valuable hands-on learning, which we believe is integral in preparing you to lead and succeed. I encourage you to take advantage of these opportunities to become the best you can be. We also invite our students to connect to the campus and the neighbouring communities. UOIT students enjoy a stimulating campus life experience that includes a wide variety of clubs, cultural and community events. We are proud of our outstanding recreational...
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...This text was adapted by The Saylor Foundation under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 License without attribution as requested by the work’s original creator or licensee. Organization The overarching logic of the book is intuitive—organized around answers to the what, where, why, and how of international business. WHAT? Section one introduces what is international business and who has an interest in it. Students will sift through the globalization debate and understanding the impact of ethics on global businesses. Additionally, students will explore the evolution of international trade from past to present, with a focus on how firms and professionals can better understand today’s complex global business arena by understanding the impact of political and legal factors. The section concludes with a chapter on understanding how cultures are defined and the impact on business interactions and practices with tangible tips for negotiating across cultures. WHERE? Section two develops student knowledge about key facets of the global business environment and the key elements of trade and cooperation between nations and global organizations. Today, with increasing numbers of companies of all sizes operating internationally, no business or country can remain an island. Rather, the interconnections between countries, businesses, and institutions are inextricable. Even how we define the world is changing. No longer classified into simple and neat...
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