Harvard Business Cases

Valuation
Fin 321
Dr. Ghosh
Adriana Nava
Kristie Tillett
Grace Tung
Eddie Pinela
Zhibin Yang

Introduction
o Background
o History
Question I : Is Mercury an appropriate target?

Question II: Are the given projections appropriate?

Question III: Estimate the value of Mercury
o Given information
o Formulas
o Detailed calculations

Conclusion

Outline
West Coast Fashions Inc.
WCF is a large designer and marketer of men's and
women's branded apparel

WCF is planning for a reorganization which includes the
shedding of its footwear division, Mercury Athletic

Athletic and Casual Footwear
Industry
Competitive
Casual segment
Athletic segment
Lifecycle
12-16 months
Import taxes and tariffs
China

Mercury Athletic
Branded athletic / Casual footwear
Mercury was founded by Daniel Fiore
$431.1 million / $51.8 million
Financial Performance
Mercury products
Athletic Footwear
o Men - largest segment and constituted its core business
o Women - had subpar performance
Casual Footwear
o Men - peaked in 2004, declined since then
o Women - worse-performing line of shoes

Mercury Athletic
Performance
In late 2006
o Didn't fit with WCF
Mercury's size
customers
brand image
o Determined to sell the business

Mercury's prospective buyer was Active Gear Inc.

Active Gear Inc.
Founded in 1965
Privately held footwear company
The most profitable firms in the footwear industry
Beginning 1970s
o Casual/ recreational footwear
o Age 25-45
Sold by 5700 retail stores
Outsourcing
However, the company was much smaller than many
competitors and AGI's executives felt its small size was
becoming a competitive disadvantage

Given Information
Cost of debt - 6%
Risk free rate1 - 4.93%
Risk free rate2- 4.69%
Expected market return - 9.7%
Tax rate - 40%
Beta - 1.6


Question I
Is mercury an appropriate target for AGI? Why or why
not?
Estimates based on assumptions
Sufficient evidence to suggest it will be advantageous
for AGI to acquire Mercury Athletics.
Culture is important
o If the cultures drastically differ
Inhibit efficiency
Effectiveness of strategic planning.
Diagram
Diagram 1

Acti

The revenues
o Comparable
o Very closely identical
Mercury athletic has lower overhead costs
o Acquisition
o More leverage with producers.

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


CAGR = 9.7%
o Expected market return V.S. CAGR
o CAGR has no risk in formula

3.0% revenue growth end of time
Question III
Estimate the value of Mercury using a discounted cash flow approach
and Liedtkes base case projections. Please show your work, and explain
any assumptions that you make.

Free cash flows cont.
We repeated the same process for cash flow
years 2008 -2011.

o 2008 - $26,729
o 2009 - $22,098
o 2010 - $25,473
o 2011 - $29,544
Cost of Equity

CAPM = KRF1 + ( KM - KRF2 )
4.93%+ 1.6 (9.7%-4.69%)
= 12.95%
(CostS)
*assumption CAGR


WACC
WACC = WD costD (1 - T) + Ws costs

0.2 [0.06 ( 1- 0.4)] +0.8
(0.1295)
=0.0072 + 0.1036
=11.08%
Terminal Value Formulas
VN= FCFn ( 1 +g FCF )
WACC-gFCF

= $29,544 ( 1 + 0.03)
0.1108 - 0.03
= $376,613


Enterprise Value

Conclusion
Based on enterprise value $359,653 as well as
increasing market share in manufacturing
leverage we believe that AGI should go
through with the acquisition at the enterprise
value price.

ANY QUESTIONS?!
Thank you!