It could be suggested that the discounted cash flow analysis carried out in this report generates a value of Mercury Athletic Footwear that could be considered as a conservative estimation. From the analysis, it could be noted that the business is valued at $299,507 million. However, it could be argued that this valuation ignores various factors such as synergy or economies of scale that would be generated after the merger between the two companies. Furthermore, another approach to valuation could use the industry average multiple. In this case, Mercury Athletic Footwear could be valued at a higher value.
We will write a custom Essay on Mercury Athletic Footwear’s Discounted Cash Flow specifically for you
301 certified writers online
Table 1: Valuation
|EBIT x EBIT Multiplier||2011 valuation|
|64,612 x 10.5 =||$678,426|
|Free Cash Flows||$30,240||$21,238||$26,729||$22,098||$25,473||$29,544|
|IRR||0.24 or 24%|
Table 1 indicates that the present value of expected future cash flows is $499,607.85 million. However, it could be noted that future cash flows are estimated based on a low growth rate. If the growth rate is increased, then the value of Mercury Athletic Footwear would also increase. It could be indicated that the merger between the two companies would generate positive business outcomes and synergies that could increase the growth rate and future cash flows.
The company can finance the acquisition by using two sources of funds including internal equity and debt. It is recommended that the company should complete the acquisition of Mercury Athletic Footwear by borrowing funds from debt providers. The reason is that it would help the company to utilize debt funds with low cost rather than high-cost equity. The analysis indicates that the cost of equity is 12.6%. The company should borrow funds and seek to optimize its capital structure and lower its weighted average cost of capital (WACC). The company should work on improving its debt to equity ratio value. It would help the company to increase shareholders’ confidence in its decision to acquire Mercury Athletic Footwear. Furthermore, AGI can lower its cost of funds by reinvesting its earnings. For this purpose, another valuation method i.e. Modified Internal Rate of Return (MIRR) can be used to determine the feasibility of acquisition.
The additional sources of value can be identified based on qualitative and quantitative analysis of the information regarding the targeted company and the acquirer.
The acquisition of Mercury Athletic Footwear can create business synergies. AGI can improve its asset efficiency by investing in the development of its inventory management system. The outcome of this investment would be a reduction in the number of inventory days from 61.1 days to 42.5 days. It implies that the company would be able to convert its inventory into sales faster. It would also have a positive impact on the company’s cash conversion cycle as it would generate cash for reinvestment and expansion of its business. Furthermore, it could be indicated that the merger decision would help the company to reduce its operating costs and funds tied up in its working capital.
The merger between the two companies would also assist AGI to take advantage of Mercury’s Women’s Casual Footwear product line by generating higher sales and improving its operating profit. The company is expected to experience a major shift in its sales from Mercury’s Women’s Casual Footwear product line. It could be indicated that the company experienced a decline in sales in 2005 and 2006. It is important for AGI to take initiatives to increase its sales. It is anticipated that the company would experience a sales growth of 2%. It is also expected that the merger would help AGI to recover from its current operating loss condition and earn an operating profit margin of 9%.
It could also be argued that the merger would help AGI to negotiate better terms with its suppliers and low its cost of sales. The company could experience an increase in its procurement from 20% to 40% as its sales increase. The company can achieve economies of scale and improve the efficiency of its distribution network.