Mercury Footwear Questions
Among the first companies to offer fashionable walking, hulking and boating footwear. Its mother company decided to extend the brand by creating complementary line of apparel. Because of the poor performance, it was decided to sold. Style Logo is marked with prosperous, active and fashion-conscious lifestyle. Its main customers are not interest in its apparel. Financial performance Among the most profitable firms. Had poor performance after acquisition by WAC. Revenue contribution 42% of revenue from athletic shoes and balance from casual footwear.
Revenue and operating Income were 470. Million and 60. 4 million In 2006. Revenue and EBITDA were 431. 1 million and 518 million.. Products Athletic shoes developed from high-performance footwear to athletic fashion wear. Four main segments: men’s and women’s athletic and casual footwear. In order to emphasizing individual products, it began to monitor styles and images from global culture Focus on smaller portfolio of classic products with longer lifestyles and could maintain simple production and supply chains.
Sales channels Mainly sold in department stores, specialty retailers, wholesalers and independent distributors. Small percentage is sold through website. Department stores, specialty stores, catalogs, discount retailers and internet. Inventory management Good at inventory management in the industry. Inventory management performance is worse than the average level. Outsource Outsource manufacture in China. Outsource main materials in foreign suppliers. Advantages &Disadvantages It takes small size as its competitive disadvantages.
And it faced with some problems in the consolidation of manufacturers. Price cuts and promotion in apparel line hurts operating margins but helped to the growth in sales. Sales growth is lower than the average because of there is little discount in price. We could learn that managers of GAG want to enlarge the scale of its company and gain larger market share because of the stable profit margin. And since the revenue is almost the same, it is a good choice to merge with Mercury, which means that revenue would be doubled after acquisition.
And these two companies have some similar factors, such as : (1) They could use the same sale channels after acquisition, and internet channel could be enlarged. (2) They could combine manufacturers to get a powerful bargain in suppliers. 3) The product segments are almost the same, which means that there should be little work to do after acquisition in product adjustment. (4) Thanks to the profitable ability of GAG, it is much easier to make a better financial performance of Mercury. (5) It is good for them to increase the performance of inventory management if they merge together. 6) Although their target customers are different, especially in ages, which means that style and brand are different in the very beginning, this factor could turn into an advantage for the new company could have a fully segment of customers with wider age ranges. Therefore, take into above factors into account; we think that Mercury should be an appropriate target for GAG. 2. Review the projections formulated by Little. Are they appropriate? How would In the case, we could find that Little used historical averages to assume the overhead-to-revenue ratio.
However, historical data is usually useless for future. Some studies found there is little evidence that firms grew fast continued to grow fast in the next period. And sometimes there are even negative correlations between growth rates in the two periods. Besides, smaller firms tend to be more volatile than others, which we could find the same characteristics in these two firms we are talking about. And Just as we mentioned in the question 1, revenue may be doubled after acquisition, it Just fits the theory that it is difficult to maintain historical growth rates as firms double or triple in size.
Therefore, based on the above analysis, we think that it is not reasonable to use historical data for future projections. And sometimes, analyst should be better than the historical growth. Considering that there are five main channels for analyst forecasts: firm-specific information, macroeconomic information, information revealed by competitors on future prospects, private information about the firm and public information other than earnings, we think Little could find more information from above channels to get more accurate assumption.
And since performance of Mercury is poorer than the average of the industry, it is better to use industry average level for the benchmarking of Mercury when predicting, instead of a discount rate of GAG for example. And from the comparison of 2007 to 2006, we can find Ileitis’s forecast need great input from GAG to support the development of Mercury, whether he has taken this into consideration? And he estimate debt/equity ratio remains the same as GAG, that is also unreasonable, for it is not possible to change that in short period.