A) Is Mercury an appropriate target for AGI? Why or why not?

There are characteristics of Mercury that make it an appropriate target, and some that make it not. The different characteristics presented in the case are as follows: Acquisition appropriate: * Same industry/similar products, and Mercury does their manufacturing in China (Pg 4) like AGI, so Mercury would increase the leverage with contract manufacturers (Pg 1), which helps since AGI does most of its manufacturing in China, and China just had a recent wave of consolidation among Chinese contract manufacturers which gave the Chinese more leverage over AGI (Pg 3) * The merger would expand AGIs presence with key retailers and distributers (Pg 1) * Mercury would double AGIs revenue (Pg 1) * 42% of AGIs revenue comes from athletic shoes (Pg 2), which Mercury specializes in (Pg 5-6), which could add to AGIs athletic presence, rather than getting most of their revenue from the casual segment * Mercurys much higher rate of revenue growth, almost 3-4 times as much (Pg 12), could compensate for AGIs very low revenue growth as of late (Pg 3); making the company more palatable to the eyes of investors and shareholders * Mercurys low cost of shoe-making (Pg 5) could possibly synergize to further reduce the price of AGIs products to help with the lower profit margins that AGI has been experiencing due to continuing pressure from suppliers and competitors (Pg 3) * Because Mercury was quite autonomous, and maintained its own financial statements, databases, resource management systems, and distribution facilities (Pg 4), the transition to being owned by AGI instead of WCF would happen more smoothly * Mercurys mens casual segment is their highest profit margin product, despite the small size (Pg 6); which AGI could leverage and synergize off of as AGIs casual segment which brought in 58% of revenue (Pg 2) Acquisition not appropriate:

* AGI focused on classic products with longer lifestyles (Pg 2), rather than Mercury, who had to keep up with the times and constantly adapted to meet the changing demands and wants of the hip extreme sport, and global youth, culture (Pg 4) * Big difference in days in inventory between AGI and Mercury (Pg 2-3), which the differing inventory management styles will most likely interfere with each other rather than synergize; although Liedtke believed that AGIs inventory management system could be adopted by Mercury at little incremental cost and would reduce Mercurys DSI to the same level as AGIs (Pg 7) * Mercury concentration is on a different demographic than AGIs * The acquisition would most likely entail having to buy the womens casual line of Mercury, even though it will most likely have to be wound down and written off as a loss afterwards (Pg 6); although, it might be possible to fold the operation into AGI rather than discontinued (Pg 7) In conclusion, when analyzing the textual facts presented by the case, without running the DCF model, it appears that this acquisition should be undertaken, as there are a lot more positive possibilities that can come from the acquisition rather than the negative ones that were presented. B) Review the projections by Liedtke. Are they appropriate? How would you recommend modifying them? Liedkes projected revenue growth of 3% is not accurate I feel, as when I take an average of the revenue growth (2005/2004=5%, 2006/2005=20%; (5+20)/2~12.5%) it is 12.8%, which is much higher than Liedtkes extremely conservative forecast. Also, Liedtke says contradicting statements when he talks about keeping the womens casual line and folding it into AGIs womens casual line, but he also talks of writing off Mercurys womens casual line as well. In Liedtkes performance projection for 2007-2011 he writes off the womens line starting from 2008 and until 2011. Because of this, there is a drop in revenue that lowers the enterprise value. This might be done so Liedtke can get a better price on the initial acquisition purchase and then once he buys the company, he will then fold the womens line into AGIs, which will then have a higher rate of return than projected to the sellers. C) Estimate the value of Mercury using a discounted cash flow approach and Liedtkes base case projections.

To start with, this is a valuation done by Joel L. Heilprin for Mercury when the WACC is 11.06% and the long run growth rate is projected at 2.78%: However, my DCF that I calculated uses a WACC of 8.73% and a long-term growth rate of 3%. Though the difference from Heilrpin is substantial, it reflects the possible different values such as the treasury securities date that I chose, though I cant see what the values of Heilrpins are to compare. Here is my DCF, but please refer to the excel file for all the formulas and values I used to come up with this end result: Here are some of the other calculations I used to arrive to this enterprise value of Mercury: D) Do you regard the value you obtained as conservative or aggressive? Why? When comparing against Heilrpins enterprise value, my projection is obviously aggressive. From my lower WACC calculations, this drops the cost of capital down, which has the inverse effect of raising the price of the enterprise value. With my higher enterprise value, this creates a final cost to the buyer that is higher than Heilrpins, which would be considered aggressive, rather than conservative. E) How would you analyze possible synergies or other sources of value not reflected in Liedtkes base assumption? Accordingly to the acquisition appropriate/not appropriate section I previously wrote, the synergies can be distilled to: * Greater leverage with Chinese manufactures * Greater level of distribution since both companies can leverage off of each others networks * Greater (double) level of revenue, creating larger market share, which can be used as leverage for a variety of reasons * Mercurys womens line might possibly not go to waste (rather than how Liedke has it written off in the performance projection), and when folded into AGIs line, might add value to the total value of the acquisition, rather than subtract or have a neutral effect

* AGIs main product is the mens casual line; and when bringing in Mercurys high-profit but low-in-production mens line, Mercury and AGI might be able to synergize their mens casual lines together to create a big selling and high profit mens casual line * Instead, or also, Mercury could help AGI switch over from the mens casual line being the highest selling, to their mens athletic line, since Mercury specializes in mens athletic footwear, as it is their core business