Active Gear Inc - Mercury Case Study

Part 1 Acquisition Overview

Active Gear, Inc. has enough motivations to acquire Mercury Footwear. In 2006, AGI's revenue and operating income were $470.3 million and $60.4 million respectively. This relatively small size created a competitive disadvantage for AGI. Since the athletic and casual footwear industry is a mature, highly competitive and stable industry, to expand into a bigger size is a good way for AGI to gain more competitive advantage. By acquiring Mercury, AGI can double its' size and achieve growth in the shortest time. With bigger size, AGI increases the leverage with contract manufacturers in China, and expanded the customer network.

The acquisition can achieve economies of scale to some extent, too. Since the contract manufacturers needed in these two companies are almost the same, the acquisition will make the company more powerful when negotiating the contracts and achieve the economies of scale.

There are some synergies after the acquisition. First, the acquisition will expand AGI's market since Mercury is a mid-ranged brand focused on extreme sports lovers in their 10s and 20s. Second, the better inventory management system in AGI will help Mercury to avoid inventory write down to some extent. The different price strategy in Mercury may influence the price strategy of AGI and help in increasing sales.

But this acquisition is also risky. By acquiring Mercury, AGI will enter into a new market with totally different strategy. The synergies we discussed above may not be achieved in the first few years because the different target demand faced with these two different companies. For instance, the marketing expense will not decrease because of the different clients groups.

Based on the benefits and risks we talked above, our group thinks that Mercury is a proper target for AGI. But AGI should be very careful in developing the new strategies for these totally different brands to achieve bigger synergies.