IS MERCURY AS GOOD FIT ?

DISCUSS BRANDS, PRODUCTS, CUSTOMERS, DISTRIBUTION, AND SPECIFIC SOURCES OF VALUE Mercury is popular among the youth, mainly ages 15-25, through athletic and casual footwear. AGIs main clients are between 25 and 45 years of age. Acquiring mercury will help to diversify AGIs product base, broaden its markets, and bring in more customers. Both Mercury and AIG are relatively small businesses in the footwear industry. (AGI 2006 revenue was $470.3 million, while Mercury 431.1 million). By joining, they will be able to place larger orders and have more leverage with suppliers, and also key retailers and distributors. Since the target segments are different, there will be very little cannibalization. Mercury has a weakness in terms of comparatively large Inventories. They can use AGIs inventory management system to reduce their days sales in inventory (DSI), thus generating synergies in the acquisition. Mercury has a well-developed distribution system. AGI can use it to distribute its existing products and save operating costs. Mercury has developed an efficient and efficient operational infrastructure. This can help AGI expand its sources, reduce dependence on particular suppliers, and enhance bargaining power. Mercury enjoys financial advantages in the mens athletic footwear market and has cost advantages because of simple design and basic raw materials. They will bring competitive advantages to AGI. In conclusion, Mercury is a good fit for AGI.

DISCUSS AGI STRENGTHS/WEAKNESSES COMPARED TO OTHER BIDDERS Strengths: AGI has good inventory management practices. It has a DSI much lower than the industry average. (42.5 days compared to average of 50.9) They have a rigorous screening and certification process for manufacturers to ensure quality and on-time delivery. They have resources in place to monitor contract manufacturing on-site from sourcing of materials all the way through final inspection. They have a better margin on their products than competitors.

Weaknesses: Small size compared to other industry players. AGI did not have very good sales growth in the last 3 years (due to competitors prices as well as not selling through discount retailers).

USE BETA AND CAPM TO DEVELOP COST OF CAPITAL FOR MERCURY We removed D&B Shoe Company from the list because its beta is too high and viewed as an outlier. We also removed Victory Athletic as its considerable revenue ($15.4 billion) and equity market value ($35.3 billion) are not comparable to Mercurys. We used the averaged comparable equity beta (1.48) as Mercurys beta. Company Marina Wilderness General Shoe Corp. Kinsley Coulter Products Surfside Footwear Alpine Company Heartland Outdoor Footware Templeton Athletic Average Equity Beta 1.94 1.92 1.12 2.13 1.27 1.01 0.98 1.48

We consider the 20 year Treasury bond rate (4.93%) as the risk free rate, and the cost of equity is worked out as 13.07% by CAPM: Ke=Rf+ Beta * (Rm-Rf). Risk free rate Market risk premium Beta Cost of Equity 4.93% 5.50% 1.48 13.07%

Setting the debt ratio as 30%, we obtained WACC as 11.18%. Pre-tax cost of debt Tax rate After-tax cost of debt Cost of equity Debt as % of capital Equity as % of capital WACC 6.00% 40% 3.60% 13.07% 20% 80% 11.18%

USE INCOME APPROACH (DCF) TO VALUE MERCURY. DISCUSS AND INCLUDE SYNERGIES AS APPROPRIATE. WHAT SYNERGIES CANNOT EASILY BE QUANTIFIED ? We calculated the increase in NWC by using the data in Exhibit 7.
Select Balance Sheet Accounts Accounts Receivable Inventory Prepaid Expenses Liabilities Accounts Payable Accrued Expenses Less: Increase in NWC 2006 45,910 73,149 10,172 16,981 18,810 2007 47,888 83,770 14,474 18,830 22,778 (11,082) 2008 48,857 85,465 14,767 18,985 22,966 (2,615) 2009 53,164 92,999 16,069 20,664 24,996 (9,434) 2010 56,978 99,672 17,222 22,149 26,792 (8,359) 2011 59,715 104,460 18,049 23,214 28,081 (5,998)

Without synergies, the estimated equity value for Mercury is $513,063,000.

Without Synergy Effects: Men's Athletic: Revenue Less: Operating Expenses* O perating Income Men's Casual: Revenue Less: Operating Expenses* O perating Income Women's Athletic: Revenue Less: Operating Expenses* O perating Income Women's Casual: Revenue Less: Operating Expenses* O perating Income 2007 251,957 218,435 33,522 2008 282,192 244,647 37,545 2009 310,411 269,112 41,299 2010 335,244 290,641 44,603 2011 352,006 305,173 46,834

52,179 43,834 8,345

53,223 44,711 8,512

54,287 45,605 8,682

55,916 46,973 8,943

57,594 48,382 9,211

138,390 124,302 14,088

153,613 137,976 15,638

167,438 150,393 17,045

179,159 160,921 18,238

188,117 168,967 19,150 Women's Casual: EBIT margin Sales growth rate

36,802 37,265 (463) 2007 479,329 423,836 8,487 47,006 18,802 28,203 (11,983) 9,587 (11,082) 14,725 1 0.90 13,282

0 0 0 2008 489,028 427,333 8,659 53,036 21,214 31,822 (11,983) 9,781 (2,615) 27,004 2 0.81 21,972

0 0 0 2009 532,137 465,110 9,422 57,605 23,042 34,563 (11,983) 10,643 (9,434) 23,788 3 0.73 17,460

0 0 0 2010 570,319 498,535 10,098 61,686 24,675 37,012 (11,983) 11,406 (8,359) 28,076 4 0.66 18,588

0 0 0 2011 597,717 522,522 10,583 64,612 25,845 38,767 (11,983) 11,954 (5,998) 32,740 5 0.60 19,553

9% 3%

Consolidated Revenue Less: Operating Expenses* Less: Corporate Overhead Consolidated O perating Income T ax @ 40% Debt-free earnings Less: CAPEX Plus: Depreciation Less: Increase in NWC FCFs Discount periods Discount factors PV of FCFs

DCF Assumptions Discount rate (WACC) EBIT multiple Valuation date T ax rate

11.18% 9 12/31/2006 40%

Terminal Value 2011 EBIT DA T erminal Value discount period discount factor PV of T V

76,565.9 689,093.3 5 0.60 411,532

PV of TEV 502,387 Less: Debt 0 Plus: Cash and cash equivalents 10,676 Estimated Equity Value 513,063 * Operating Expenses include an allocation of depreciation for each segment.

With synergies, the estimated equity value for Mercury would be $531,045,000. We re-calculated revenues and operating incomes for the Womens Casual division by assuming the revenue growth rate as 3% and the EBIT margin as 9%. Then the consolidated values are updated as shown in the above table. Subtracting NWC and CAPEX as well adding depreciation, we found FCFs from 2007 to 2011. In addition, we calculated the terminal value ($722,644,600) by EBIT multiple. Discounted by WACC, the present value of the TEV is obtained as $521,369,000. Comparing the above results, we could tell that the synergies improved the equity value by $25,678,000. Though the acquisition will help elevate the operational efficiency of Mercury, its hard to quantify the savings on operating expenses, as well synergy effects on CAPEX, NWC, and depreciations.
With Synergy Effects: Men's Athletic: Revenue Less: Operating Expenses* O perating Income Men's Casual: Revenue Less: Operating Expenses* O perating Income Women's Athletic: Revenue Less: Operating Expenses* O perating Income Women's Casual: Revenue Less: Operating Expenses* O perating Income 2007 251,957 218,435 33,522 2008 282,192 244,647 37,545 2009 310,411 269,112 41,299 2010 335,244 290,641 44,603 2011 352,006 305,173 46,834

52,179 43,834 8,345

53,223 44,711 8,512

54,287 45,605 8,682

55,916 46,973 8,943

57,594 48,382 9,211

138,390 124,302 14,088

153,613 137,976 15,638

167,438 150,393 17,045

179,159 160,921 18,238

188,117 168,967 19,150 Women's Casual: EBIT margin Sales growth rate

36,802 37,265 (463) 2007 479,329 423,836 8,487 47,006 18,802 28,203 (11,983) 9,587 (11,082) 14,725 1 0.90 13,244

37,906 34,495 3,412 2008 526,935 461,828 8,659 56,448 22,579 33,869 (11,983) 9,781 (2,615) 29,051 2 0.81 23,502

39,044 35,530 3,514 2009 571,181 500,640 9,422 61,119 24,447 36,671 (11,983) 10,643 (9,434) 25,897 3 0.73 18,844

40,215 36,596 3,619 2010 610,534 535,130 10,098 65,306 26,122 39,183 (11,983) 11,406 (8,359) 30,247 4 0.65 19,796

41,421 37,693 3,728 2011 639,138 560,215 10,583 68,340 27,336 41,004 (11,983) 11,954 (5,998) 34,977 5 0.59 20,590

9% 3%

Consolidated Revenue Less: Operating Expenses Less: Corporate Overhead Consolidated O perating Income T ax @ 40% Debt-free earnings Less: CAPEX Plus: Depreciation Less: Increase in NWC FCFs Discount periods Discount factors PV of FCFs

DCF Assumptions Discount rate (WACC) EBIT multiple Valuation date T ax rate

11.18% 9 12/31/2006 40%

Terminal Value 2011 EBIT DA T erminal Value discount period discount factor PV of T V

80,293.8 722,644.6 5 0.59 425,394

PV of TEV 521,369 Less: Debt 0 Plus: Cash and cash equivalents 10,676 Estimated Equity Value 532,045 * Operating Expenses include an allocation of depreciation for each segment.

USE COMPARABLE METHOD (RELATIVE VALUATION ) TO VALUE MERCURY P/E multiple to calculate equity value and enterprise value:

Marina Wilderness, Victory Athletic and Heartland Outdoor Footwear are excluded from the industry P/E ratio. Average P/E ratio is 7.8 times the earning. The equity value of Mercury is calculated by 2006 Earnings ($25,998,000) * 7.8 =$202,784,400. Enterprise value ($253,480,500) was then worked out by the Debt to Equity ratio. EBITDA multiple to calculate equity value and enterprise value:

Marina Wilderness, Victory Athletic and Heartland Outdoor Footwear are excluded from the industry EBITDA multiple. Average EBITDA multiple is 8.95 times the EBITDA. The enterprise value of Mercury is calculated by 2006 EBITDA ($51,804,000) * 8.95 EBITDA Multiple =$463,723,580. The equity value ($457,418,580) is measured by TEV+ Cash and Cash Equalivents ($10,676)-Interest paying portion of debt ($16,981).

USE RESULTS OF DCF AND RELATIVE VALUATION TO ARRIVE AT PRICE ESTIMATE TO PAY ($in thousands) DCF Enterprise value: $521,369 Equity value: $532,045

Relative Valuation Enterprise Value: $358,602 *(EBITDA ($463,723) + P/E Ratio ($253,480.5)) Equity Value: $330,101.5 * (EBITDA ($457,418.58) + P/E Ratio ($202,784.4))

Combination Enterprise Value: $439,985 * (Relative Valuation ($358,602) + DCF Enterprise Value ($521,369)) Equity Value: $432073.3 * (Relative Valuation ($330,101.5) + DCF Equity Value ($532,045))