CASE ANALYSIS: MERCURY ATHLETICS FOOTWEAR: VALUING THE OPPORTUNITY Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

CASE ANALYSIS: MERCURY ATHLETICS FOOTWEAR: VALUING THE OPPORTUNITY Case Solution

There are numerous synergies which can be found in AGI and Mercury Athletics. However, some potential synergies which can make a better cost and revenue structure after acquiring Mercury include increased sales and production capacity, cost efficiency towards forwards channels, increased bargaining power over suppliers and buyers, reduced number of employees and increased corporation size.

Moreover, after acquiring Mercury Athletics, the company will incur a lower cost as the company will be able to buy raw materials in huge bulks which will allow it to take more discounts and packages which will reduce the manufacturing cost. Furthermore, the fixed cost will decline followed by bulk production. Finally, after the acquisition, the company will be able to make more profits while maintaining same prices.

Afterwards, by following the above steps, the company will be able to bargain for a higher power with its suppliers and buyers due to its increased size and extensive purchasing and selling requirements. As far as the monetary value of the synergies is concerned, it can be seen from the case that the head of business development at AGI, John Liedtke, suggested that this acquisition will almost double the revenue and ultimately increase the profitability of the company.

Valuation of Synergies at the time of Acquisition

There are numerous ways to evaluate the value of synergies while bidding for an acquisition. Moreover, these methods have different approaches which can be used to determine the actual value of the synergies. Furthermore, sometimes these synergies can be assessed at revenue/ profit gains, cost reductions, economies of scales, increased market share and reduced competition.

As far as the value of synergies, in this case, are concerned, it can be seen that AGI was under intense pressure from its suppliers as well as its contract manufacturers to increase its productions. As many contractors or buyers from China were favoring that supplier which had large manufacturing facility,therefore, it can be said that the company followed this acquisition because of some reasons which include increased production, reduced cost, increased market share and reduced competition. Moreover, in this case, increased margin valuation has handled these synergies.

Winners’ Curse

When companies or some of their divisions are sold on competitive bidding, the company which successfully acquires the firm or group is referred to as winner or winning business. However, sometimes some companies bid over the intrinsic value and buy companies which have more than their intrinsic value. Due to this excess value, the acquiring company is known as winner curse. The reasons behind this curse or overvaluation include incomplete or inappropriate information, emotions or real attraction towards the business. Due to this, overvaluation or acquiring a company over its real intrinsic value, the winner is cursed.

Financial Analysis

Cost of Equity

The cost of capital of the firm is measured by adjusting the betas of comparable companies and then that beta is adjusted to unleveraged beta and finally, by taking the average of all those betas, the final beta calculated is 1.278 however, this beta is showing aggressive attributes which indicate that the portfolio will increase by almost 28% on the market.Nonetheless, this is a good sign but this should be kept in mind that the market does not always improve, as it also face downfalls as well.

After calculating the beta, the cost of equity was estimated for the company using the Capital Asset Pricing Model and the cost of fairness was 10.89%. Moreover, it indicates that the firm has 10.89% of their equity holders regarding dividends and etc.....................

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CASE ANALYSIS: MERCURY ATHLETICS FOOTWEAR: VALUING THE OPPORTUNITY Harvard Case Solution & Analysis