Review the projections formulated by Liedtke. Are they appropriate? How would you recommend modifying them?

In March 2007, John Liedtke, the head of business development for Active Gear, Inc., a privately held footwear company, was contemplating an acquisition opportunity. West Coast Fashions, Inc. (WCF), a large designer and marketer of men’s and women’s branded apparel had recently announced plans for a strategic reorganization. The plan called for a divestiture of certain non-core assets and a renewed focus on WCF’s higher-end business, business-casual, and formal-wear apparel businesses. One of the divisions WCF intended to shed was Mercury Athletic, its footwear division. Liedtke knew that acquiring Mercury would roughly double Active Gear’s revenue, increase its leverage with contract manufacturers, and expand its presence with key retailers and distributors. He also expected that Active Gear’s bankers would quickly approach the company about a possible bid for Mercury; consequently, he wanted to complete his own rough evaluation of the opportunity before hearing the bankers’ pitch.

Footwear was a mature, highly competitive industry marked by low growth, but fairly stable profit margins. Despite the industry’s overall stability, the performance of individual firms could be quite volatile as they vied with one another to anticipate and exploit fashion trends. The market for athletic and casual shoes remained fragmented, despite the presence of a small number of global footwear brands. In the casual segment, companies competed on the basis of style, price, and general quality. In the athletic segment, competition revolved around brand image, specialized engineering for performance, and price.

Within the fashion-sensitive part of the industry, product lifecycles tended to be short, sometimes lasting only a season. Consequently, active management of inventory and production lead times were critical success factors. Although a few firms sold their products in company-owned retail stores, the large majority of athletic and casual footwear was sold through department stores, independent specialty retailers, sporting goods stores, boutiques, and wholesalers. In 2007, many companies were actively engaged in attempts to sell directly to customers via web-based e-commerce platforms. So far, successes in this venue had been small in both size and number.