Mercury Athletic Footwear: Corporate Valuation - Essay Example

? Mercury Athletic Footwear Case Study: Corporate Valuation First Mercury Athletic Footwear Case Study: Corporate Valuation Takeovers of existing companies and especially a manufacturing company are fraught with uncertainty and a great degree of grey areas. John Liedtke and Active Gear would have to be very careful that the new acquisition does not only distract from their own continued and steady growth and that the reasons for which West Coast Fashions saw it fit to get rid of Mercury do not bog down Active Gear in the same way. So John Liedtke would have to be very careful and strategic in his negotiation. This is a company whose growth has been faltering at best and there would be need to not only redesign but to totally restructure it in order to ensure that the expected profitability is achieved. So the negotiating tactic would involve pointing out the reasons that led to the disappointing performance of Mercury and the decision to sell it in the first place. The company has not been pulling its weight in West Coast Fashionsstable, a cat that is borne by its disappointing profit margins (Falk and Hagman 2002). Competition in branded footgear is cut-throat and trying to sell branded sporting footwear is even more tricky as it has to combine the fickleness of fashion apparel with the practicality and purposefulness of sporting wear, a factor that contributed to Mercury’s dismal performance especially in the ladies casual footwear department. Active Gear would have to point this out as a major impediment in their future marketing products that they acquire from the West Coast Fashions group. There is also need to consolidate manufacturers in Asia. The more split up the manufacturers an manufacturing plants the higher the maintenance costs and lower the profit margins so Active Gear would have to aggressively work on rationalizing and improving the efficiency of the manufacturing plants overseas and integrating them with their own existing ones. Staffing costs are also always a sticking point when it comes to acquiring new firms and Active Gear would have to bear the costs of reorganizing as well as restructuring staffing levels at the new outfit not only to make it conform with Active Gear’s own existing staff and staffing levels but also do this without adversely affecting productivity and staff morale which is always a challenge. Then there are the costs associated with layoffs and redundancies that would certainly have to be factored in. From the attached tables the lowest offer that AG would make for Mercury would be $300 million based on past performance and the expected revenues. The highest price that Active Gear should pay for Mercury is $330 million (Falk and Hagman 2002). The long term prospects of the major are the main driving force for this acquisition as the short term prospects coupled with the massive reorganization that would have to be done to integrate Mercury products into Active Gear’s own schedules, marketing and planning would take a long time. The Discount Rate used for this calculation took into account the EBIT margin of 9% and expected revenue growth of 3%.So Lietdke’s major tack would be to point out all the work that would need to be done to make the acquisition [profitable for Active Gear while pointing out the expected rise in income that all these measures would result in if they were to be successful. The outsourcing of manufacturing to China which has become increasing popular with American manufacturers has both gainers and losers. The major players who gain with this sort of outsourcing are the American companies which are able to keep their production prices relatively low and thus produce products that can be more competitively priced and which results in higher profits. The other gainers in this process are the Chinese manufacturing plants whose staffs are employed in these plants. They are able to maintain jobs and keep themselves in employment at the expense of American factory workers who would otherwise be occupied in such plants in the US (Falk and Hagman 2002). Other gainers include all the other industries that are kept afloat by this enterprise such as the shipping companies and the other players in the supply chain that ensures the delivery of the finished product from the factories in Asia to the stores in the USA. The Chinese government and the Chinese population also gain in this process since they benefit from the Foreign Direct Investment offered by the American organisations building and operating plants on Chinese soil – or their collaboration on such ventures with Chinese companies and entities. Apart from the obvious loss of jobs for the American workers, there is also the transfer of the technology that would otherwise be in the US to an overseas entity that also results in a loss for the company since they lose their ownership of the designs and technology used in the manufacture to the Chinese factory owners who are then able to use and make profits from these designs and technologies (Falk and Hagman 2002). The company may also lose from the negative publicity that such manufacturing practices attracts as a result of the growing resentment of this practice in American workers who see it as exporting jobs overseas. The US also loses out in that it has to rely on the Chinese for the supply and delivery of products that are bought and used by the American public, placing them at the mercy of the Chinese economy and resulting in economic growth and expansion of China at American expense (Falk and Hagman 2002). Outsourcing of manufacturing to China is not sustainable in the long term, depending on one’s definition of the long term. The main driver of outsourcing has been the comparatively low prices of labour and components in China. However even in the recent past there has been an upward pressure on the prices of commodities as well as labour in the Chinese market. Chinese labour laws as well as the sheer size of the population and therefore low skilled or unskilled labourers have managed to keep labour prices at comparatively low levels. As the Chinese economy grows and the living standards as well as levels of education improve, the labour in China is also likely to get more expensive. Already the Chinese schools are churning out the most competitive, proficient and productive employees in the world and with the increased globalization these skilled workers will find their way into other markets, reducing the pool of available “cheap” manpower in China (Sims 2013). Already the Chinese labour costs grow at an average of 15 to 20 percent annually compared to only about 2% in the US and these costs are bound to get to the US levels in the long term. There are also a lot of hidden costs that the American and other organisations are realizing they incur in outsourcing production to Chinese factories. The fact the companies are so far away means that the costs of travelling to those factories for initial acquisition and then regularly for inspection as well as supervision do build up as do the costs of exposing their designs, ideas and innovations to the Chinese counterparts who may unfairly benefit from them (Sims 2013). The continued high growth rate that the Chinese economy continues to enjoy, even when the rest of the world including the US is experiencing reduced grown and in some cases contraction of the economy is also unlikely to be sustained in the longer term, which would result in a reduction in the rate and scope of outsourcing that is happening at present. Outsourcing of manufacturing to low-cost countries such as China does bring about a lot of ethical considerations. One of the biggest reasons given for outsourcing to other countries is the relative low cost of labour in these countries. By exporting jobs to these countries, do the American companies not exploit the workers in these countries by unfairly taking advantage of the low labour rates? This ethical problem has for long been a problem, especially considering that some of the countries to which American manufacturing services are outsourced sometimes have outdated and exploitative labour practices and laws including child labour and unsafe working conditions. The question one asks is where the line gets drawn on getting cheaper production while at the same time perpetuating the exploitation and victimization of workers in another country (Sims 2013). The downward pressure on the prices of parts used in the manufacturing process in China has also had the effect of increasing the dangers of counterfeiting and manufacturing using cheap, and in some cases, defective parts. This, coupled with the lack of the strong anti-counterfeiting legislation that exists in the US, poses a continued danger and ethical dilemma to the American companies that outsource in China. The other ethical concern is the security of manufacturing designs, processes and innovations being implemented in another country. How secure are the intellectual property rights of American innovators in the hands of Chinese implementers and what sort of economic and security risk does that pose for the United Sates especially in the long term? These are some of the ethical issues that have been brought about by the growth and development of outsourcing to low-cost countries by American manufacturers. References Falk, J. and Hagman, J. 2002. Outsourcing to China? A Swedish Perspective of Business in the 21st Century. Available at: http://www.johanfalk.com/documents/OutsourcingToChinaLong.pdf. Last accessed 6th August 2013. Sims, D. 2013. China Widens Lead as World’s Largest Manufacturer. Available at: http://news.thomasnet.com/IMT/2013/03/14/china-widens-lead-as-worlds-largest-manufacturer. Last accessed 6th August 2013. Read More