Is Mercury an Appropriate Target for Agi

1. Is Mercury an appropriate target for AGI? Why or why not?

Mercury is an appropriate target for AGI considering the following reasons:

1. The merged company can increase their sales by offering more and varied style of products, increasing the presences of AGI products in new markets that entered by Mercury.
2. Production efficiency can also be raised by consolidating the manufacturing facilities. With a foreseeable higher production volume, the new company may have higher bargaining power to negotiate for lower purchasing price from suppliers.
3. The combined company can also consolidate their logistic network and resource to reduce cost. A combined network may reduce total overhead but covering more area with better support.
4. AGI and Mercury are technically targeting different group of customers, in which their merger may help in gaining new customers segments in which the combined new company will have a more completed and enriched customers bases.

1. Review the projections formulated by Liedtke. Are they appropriate? How would you recommend modifying them?

The projection is not appropriate. Liedtke has used historical averages for the assumption in projecting future revenue, however, they did not take into account the potential gain of synergy. Therefore, we should be expecting a more aggressive figure with higher revenue projections and reduced combined costs as the increase of efficiencies.

Smaller firms tend to be volatile, notwithstanding the competitive footwear industry.  Historical growth rate may hardly maintain when the firms have grown double or triple in size. As for recommendation, we should be using other analysis information instead of historical data for projections, such as comparable companies data, macroeconomic information, competitor revealed future plans, firm specific research, etc.

1. Estimate the value of Mercury using a discounted cash flow approach and Liedtke’s base case projections. Be prepared to defend additional assumptions you make.

Assumptions: (Suggested to use conservative approach since less data point to justify)

Sales Growth: 12.75%

CGS: 57.02%

SGA: 31.42%

Depreciation/nPPE t-1: 27.26%

Cash 3.9%

A R: 9.99%

Inventory: 17.48%

PPE/Sales: 8.67%

AP/Sales: 3.94%

Accruls/Sales: 4.77%

Tax Rate: 40%

Long-run Growth: 3%

Cost of Capital

D/V ratio: 20%

Cost of Debt: 6%

Risk free rate (10-year UST): 4.73%

Risk Premium: 5%

Asset Beta: 1.37

Equity Beta: 1.57

Required return on Equity: 12.60%

WACC: 10.80%

(Insert DCF Table)

1. Do you regard the value you obtained as conservative or aggressive? Why?

This valuation methodology should be relatively conservative since the assumption and estimation are based on the historical data of AGI and less premium or growth consideration is given. Different calculations methods may help yielding a higher terminal value by giving a higher terminal value.