Mercury Athletic Footwear: Valuing the Opportunity

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At the end of the five year period, the Terminal Value (TV) for Mercury will be $380,382 with the Discount Rate set to 11% and the Growth Rate at 3%. TV is the value of a bond at maturity, or of an asset at a specified future valuation date, taking into account factors such as interest rates and the current value of the asset, and assuming a stable growth rate (Terminal Value - TV, n.d.). The Present Value (PV) TV is $225,738m. Subtracted from the TV, that is a difference of $154,644m. If Liedtke subtracts the $154,644 million from the PV TV, it would show that AGI would lose $71,094m from initial PV TV establish five years earlier.

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Sensitivity Analysis

Having evaluated the value of Mercury while utilizing assumptions that included a predetermined discount rate of 11% and an annual growth rate of 3%, Liedtke could see that the acquisition would be less costly for AGI in the long run. These initial assumptions, however, did not give a broad description of the outcomes in there was a deviation in the discount or growth rate.

Earlier, I displayed what the PV TV would be in the discount and growth rates were at 11% and 3% respectively. If the discount rate is was lowered to 9% with same growth rate of 3%, the PV TV would be $329,629m. The TV would be $507,175m, resulting in a difference of $177,546 and a closeout loss of $152,083m. That is a substantial loss at the end of the five-year period. If the growth rates were raised to 4% and the discount rate taken up to 13%, the TV for Mercury in 2011 would be $341,400m. The PV TV would be only $185,298m resulting in a difference of $156,298 and an end loss of $29,196m. This is the best case scenario when utilizing the data in the WACC spreadsheet below. Finally, in a worst case projection, if the growth rate were at 4% and the discount rate at 9%, the TV and TV would be equal to $614,519 and PV TV at $399,395m. There would be a difference of $215,123m in the TV and the PV TV. The end loss would be $184,271m. This would probably a difficult number to take up to the board and AGI investors.

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Conclusion

With the data provided and the assumption made about the future of Mercury Athletic, I think that Liedtke can make a valid case for AGI acquiring the footwear company. As long as AGI installs their own executives to implement the company’s standard procedures and policies, Mercury would be able to decrease their DSI and bring their return on interest back up to the group average. Bringing in Mercury would also double revenues for AGI consistently throughout to 2011. Finally, if the growth rates and discount rates are more favorable than the initial assumptions, AGI can greatly reduce their increase the TV at the end of the five-year period. The acquisition of Mercury Athletic is a good fit for AGI and is recommended to be pursued.

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References

Greenwood, R., & Scharfstein, D. (2006). Calculating Free Cash Flows. Boston: Harvard Business School.

Luehrman, T. A., & Heilprin, J. L. (2009). Mercury Athletic Footwear: Valuing the Opportunity. Harvard Business Publishing.

Terminal Value - TV. (n.d.). Retrieved from Investopedia: http://www.investopedia.com/terms/t/terminalvalue.asp