The Situation In early 2007, Active Gear Inc. (AGI) was considering acquiring Mercury Footwear. AGI was one of the most profitable firms in the footwear industry. AGI was; however, smaller than their competitors. This reason, along with pressure from suppliers, was compromising their financial performance and led them to consider expanding through an acquisition. Mercury Athletic Footwear specialized in footwear for the youth market. In the last couple of years, Mercury’s performance had stalled due to its unsuccessful launching of women’s casual footwear and the company’s entry into large discount retailers, which had resulted in lower profit margins. Our analysis aims to determine whether Mercury would be an appropriate target for AGI’s expansion goals. Economic and Industry Analysis U.S. Economic growth and job growth both fell in 2006 from previous years, bringing GDP to 2.7%. Consumption growth also declined, which weakened retail sales. The footwear industry is highly competitive, marked by slow growth but high, stable profit margins due to little capital spending. Consumers tend to be very price sensitive when it comes to footwear. Yet, brand loyalty is strong. Financial Analysis Liedtke projects a compound annual sales growth for Mercury of 5.67%. We believe this is a reasonable estimate considering Mercury is a well-established company with a loyal customer base. Our analysis shows a perpetuity growth rate for Mercury of 2.5%, based on economic growth prospects. Mercury is an established name in the footwear industry, with slow, steady growth. Because revenues in this industry tend to be fairly regular, stable and predictable, we found 5 years of estimates to be sufficient to give us an adequate enterprise value for Mercury. We found the following synergies when the two companies ed forces:

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Reduction of SG&A expenses by 5% for the years following the acquisition. This due to a

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reduction of various fixed costs, due to a reduction of overlapping departments and facilities Increased changes in NWC by 10%. Decreased CAPEX by 20% each year. The gain in economies of scale translated into a bigger purchasing power for both companies, whereby they can purchase PP&E at a lower cost, while also increasing the efficiency of asset usage.

Our combined pro-forma reflects the value obtained from prospective synergies likely to result due to the acquisition. We anticipate higher revenues (3% increase), as well as lower costs due to the elimination of redundant functions and manufacturing facilities. It also reflects a lower cost of capital. Since the combined company would now be a larger entity, with a greater market share and stronger revenues, the company’s cost of equity would likely decrease. We found the DSI ratio for the combined entity to be 52.8 in the year following the acquisition. The combined entity has now a greater market reach and market share, resulting in a quicker move of its inventory. Recommendation We recommend AGI purchase Mercury for a maximum price of $297,440,000. AGI can derive much benefit from acquiring Mercury, which, with its low capital spending and ability to adapt quickly to customer tastes and preferences, should contribute to increase AGI’s operating efficiency. It should also help AGI improve its market reach and brand name recognition. Our accretion/dilution analysis shows that the combined entity will create value to shareholders. (See appendix). It may, however, take more than a couple of years to fully integrate both operations and fully realize the gained efficiencies.