The Adidas – Reebok Merger
The case discusses the proposed merger of Reebok
International Limited with Adidas-Salomon AG. It describes
the recent trends and studies the ongoing merger in the
sporting goods industry. The case presents the rationale
behind the decision to merge. Finally, the case ends with a
debate on whether the merger would be successful.
The Adidas – Reebok Merger
“We want to grow both brands together faster than the individual brands and of
course, grow faster than our competitors.”1
- Herbert Hainer, Chief Executive Officer, Adidas, in 2005.
“With Adidas, we are able to offer an enabled portfolio of global brands that truly
addresses the needs of today’s and tomorrow’s consumers.”2
- Paul Fireman, Chief Executive Officer, Reebok, in 2005.
“Buying a competitor achieves two objectives, both good. It removes a competitor and
it increases your market share. As long as the price is right, it’s generally a good
move.”3
- Al Ries, Chairman, Ries and Ries Consulting in 2005.
4
“For the first time, Nike, which is actually leading the charge, has to look back over
their shoulder at someone who is nipping at their heels.”5
- Marshal Cohen, Chief Industry Analyst, NPD Group in 2005. 6
Introduction
On August 03, 2005, Adidas-Salomon AG (Adidas), Germany‟s largest sporting goods
maker announced acquisition of the US-based Reebok International Limited (Reebok) for
$3.8 billion. The share prices of both the companies recorded an increase on the day of the
announcement of the deal. The share price of Adidas increased by 7.4% from €147.52 on
August 02, 2005 to €158.45 on August 03, 2005 on the Frankfurt stock exchange, while
Reebok‟s share price at the New York Stock Exchange rose to $57.14 on August 03, 2005,
an increase of 30% over the August 02, 2005 share price of $43.95 (Refer Exhibit I for
share price movement of the two companies). The deal would result in the union of two
cutthroat competitors through a “friendly takeover”.
1
Darren Rovell, “Reebok, Adidas Have Plenty of Issues to Solve,” www.ESPN.com, August
03 2005.
2
Press Release, www.adidas-salomon.com, August 04, 2005.
3
The Merger of Titans, November 2005, Effective Executive, IUP India.
4
Ries and Ries is a business consultancy, based in Atlanta, Georgia.
5
Laura Petrecca and Theresa Howard, “Adidas-Reebok Merger Lets Rivals Nip at Nike‟s
Heels,” www.usatoday.com, August 04, 2005.
6
NPD group founded in 1967 provides sales and marketing information such as consumer
trends, sales and marketing information for a diverse range of industries.
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Mergers & Acquisitions, and Strategic Alliances
Exhibit I
Share Price Movement of Adidas-Salomon AG, August 2005
Source: www.newsvote.bbc.co.uk
Share Price Movement of Reebok International Limited August, 2005
Source: www.newsvote.bbc.co.uk
Adidas and Reebok claimed that the merger was decided upon because of the
realization that their individual (company) goals would be best accomplished by
joining instead of competing. Nike International Inc. (Nike) was the common
competitor for both Reebok and Adidas .
Analysts said that the merging companies were alike in many ways. Both the
companies had a reputation of using cutting-edge technologies to produce innovative
products and both had eminent brand ambassadors from the sports and entertainment
worlds. Thus, the merger would help spreading the global appeal of the brands in places
where they had not made a mark as individual brands.
However, some analysts had doubts about the success of the merger of the companies.
They cited that the merger would not generate much synergy because the individual
brand identities would be maintained even after the merger. Analysts also doubted the
effectiveness of the merger, as a strategy to beat Nike. They felt that the combined
entity would have to work really hard to further expand its market share in the US
market and globally.
Background Note
Adidas
The story of Adidas dates back to the year 1920 when Adolf Dassler (Adi) produced a
handmade shoe fitted with black spikes. On July 01, 1924, Adi and his brother Rudolf
Dassler (Rudolf) started a company under the name “Dassler Brothers OHG”. In the
year 1927, the company enhanced its capacity by taking on a new factory on lease.
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The Adidas – Reebok Merger
The company‟s shoes made their debut at the 1928 Olympics in Amsterdam. In 1930,
the brothers purchased the factory and named it “Dassler Brothers Sports Shoe
Factory.” The company introduced tennis shoes in 1931. In the year 1935, the
turnover of the company exceeded 400,000 Reichsmark 7. In 1938, a second
production facility was bought in Herzogenaurach, Germany.
In 1948, the brothers decided to part ways. By August 18, 1949, Adidas was registered as a
company -„Adi‟ from Adolf and „Das‟ from Dassler. Adi registered the “Three Stripes”8 as
his official logo. Rudolf set up another sporting goods company named Puma.
In 1956, Adi‟s son Horst Dassler (Horst) promoted Adidas strongly during the
Olympic Games at Melbourne. He also signed a licensing agreement with the
Norwegian Shoe factory, located in Gjovik, Norway. In 1959, Horst was assigned the
job of establishing production facilities in France. A factory in Schweinfeld, Germany
was started in the same year. In 1960, Adidas was the dominant brand at the Olympic
Games held in Rome; 75% of the track and field athletes used Adidas shoes. Adidas
stepped into the production of apparel and balls (soccer balls, basketball balls) in 1961
and started manufacturing track suits in 1962.
The company launched its first jogging shoe called, “Achille” in 1968. The “Trefoil
Logo” was introduced in 1972 (Refer Exhibit II). The essential feature of the logo was
three leaves representing the Olympic spirit, joining the three continental plates . The
company used the achievements of the famous sportspersons like Muhammad Ali
(boxing), Jesse Owens (athletics) and Franz Beckenbauer (soccer) for promoting the
brand. In 1975, Adi became a member of the National Sporting Goods Association
(NSGA)9 and the first non-American to enter the NSGA Hall of Fame. Adi passed
away in 1978 and his family began to oversee the business, which by then produced
45 million pairs of shoes in a year.
Exhibit II: The Trefoil Logo of Adidas
Source: www.adidas-salomon.com
7
The Reichsmark was the currency in Germany from 1924 till June 20, 1948. In 1948, it was
replaced by the Deutsche Mark in West Germany and by the East German Mark in East
Germany.
8
The Three Stripes were originally developed as a means to stabilize the mid-foot. Adidas‟ apparel
and shoe designs featured three parallel stripes of the same color, and it became the official logo
of the company.
9
The NSGA was founded in 1929 in New York City, by a group of sporting goods
distributors. The mission of NSGA is to help its members to profit from a competitive
marketplace.
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Mergers & Acquisitions, and Strategic Alliances
Horst died in 1987. In 1990, Bernard Tapie 10 (Tapie) bought the company for $320
million on borrowed money from Credit Lyonnais bank 11. In 1992, the bank converted
the debt into equity when Tapie failed to pay the interest on the loan. Credit Lyonnais
sold Adidas to Robert Louis-Dreyfus (Dreyfus) who was a friend of Tapie, in
February 1993. Dreyfus became the new CEO of the company in 1994. Under the new
management, Adidas stepped up its marketing efforts.
In 1995, the company got itself listed on the Paris 12 and Frankfurt 13 Stock Exchanges.
In 1997, Adidas entered into endorsement deals with top young sports stars like Anna
Kournikova (lawn tennis), Kobe Bryant (basketball) and David Beckham (soccer) to
promote its contemporary products. In the same year, Adidas acquired the Frenchbased Salomon Group14 for $1.4 billion. The company has since then been called
Adidas-Salomon AG. In 1998, Adidas was included in the DAX 15 index.
In March 2001, Herbert Hainer (Hainer) became the CEO and Chairman of the company.
The company‟s business segments included footwear, apparel and hardware/equipment
(Refer Exhibit III for product profile of Adidas). In 2004, with 110 subsidiaries and more
than 17,000 employees, the company achieved sales of € 6.478 billion and profits of € 314
million (Refer Exhibit IV for financial summary of Adidas) .
Exhibit III: Product Profile of Adidas-Salomon AG
Segments
Products
Important Brands
Footwear
Footwear, ski boots and bindings, snow
blades, golf shoes
Adidas, Taylormade Golf,
Salomon
Apparel
Snowboard apparel, hiking, apparel,
Outdoor apparel, golf apparel
Adidas, Salomon,
Arc‟Treyx, Bonfire
Equipment
Winter sports including skis,
snowboards, inline skates, climbing
equipment, skateboard equipment,
cycle components, golf equipment such
as golf balls, irons and accessories and
equipment such as bags and balls
Adidas, Salomon,
Arc‟Treyx, Cliché,
Maxfli, Taylormade Golf,
Mavic
Source: www.adidas-salomon.com
10
Tapie was a minister of Urban Affairs in the French Government and he was well-known
for rescuing bankrupt companies.
11
Credit Lyonnais is a French bank founded in 1863 by Henri Germain.
12
The Paris Stock Exchange is the second largest stock exchange in Europe. It is calledas “La
Bourse de Paris”. It is a part of Euronext, a European Stock Exchange with subsidiaries in
Belgium, France, Netherlands, Portugal and United Kingdom.
13
The Frankfurt Stock Exchange is located in Frankfurt, Germany. It is called the “Deutsche
Borse” and is the largest of eight German exchanges.
14
Salomon Group founded in 1947, is a French-based worldwide leading producer of ski, golf,
and winter sports equipment headquartered in Annecy, France. Its brands include Salomon,
Mavic, Bonfire, Cliché, Arc‟Trex, Taylormade, Firesole clubs, Salomon-in-line skates, etc.
The group was sold to Finland-based Amer Sports Corporation for €485 million in May
2005. The deal was expected to be completed by September 2005, pending an approval in
several countries.
15
DAX is an acronym for Deutscher Aktienindex. It is a German stock performance index that
tracks the performance of 30 top German stocks.
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The Adidas – Reebok Merger
Exhibit IV: Financial Summary of Adidas
Year Ended December 31
(in mn € except basic earnings per share and diluted earnings per share)
Particulars
2004
2003
2002
2001
2000
6,478
6,267
6,523
6,112
5,835
Net Income
314
260
229
208
182
Basic earnings
per share (€)
6.88
5.72
5.04
4.60
4.01
Diluted earnings
per share (€)
6.54
5.72
5.04
-
-
4,427
4,188
4,261
4,183
4,018
863
1,225
1,574
1,570
1,617
1,628
1,356
1,081
1,015
815
Net Sales
Total assets
Long-term debt
Stockholder‟s
equity
Source: Annual Report 2004
Reebok
The history of Reebok can be traced back to Joseph William Foster (Foster) who
founded J.W.Foster and Sons in the United Kingdom in the 1895. Foster
manufactured the first ever shoes with spikes to help athletes run faster. The spiked
shoes had their debut on the track in the 1924 (Summer) Olympic Games.
In 1958, two of Foster‟s grandsons started a company and named it “Reebok
International”. Reebok was a type of African gazelle 16. In 1979, Reebok International
secured distribution rights in the US, allowing it to sell its shoes in North America
through Paul Fireman (Fireman). Fireman was then an associate in the outdoor
sporting goods distributorship of the company. Later, the same year, Fireman formed
a company called “Reebok USA Limited.”
In the early 1980s, Reebok International marketed its products through a large
association of independent and owned distributors. By the end of 1981, Reebok‟s
sales surpassed $1.5 million. In 1982 the world‟s first athletic shoe specifically for
women was launched; it was called “Freestyle.” In 1984, Reebok International and
Reebok USA limited merged and Reebok International Limited was formed. In 1985,
Reebok‟s sales reached $307 million. Reebok came out with its Initial Public Offering
(IPO) the same year. Stock issued to the public at $6, rose to $38 by 1986. In 1986,
Fireman became the chairman of the company.
Reebok made a series of acquisitions in the late 1980s. It purchased the Rockport
Company17 in 1986, Avia Group International 18 in April 1987 and Ellesse
International S.P.A.19 in September 1987. In 1989, it acquired CMI‟s Boston Whaler
16
African gazelles are small, swift antelopes characteristically having a slender neck and
annulate horns.
17
Rockport Company manufactured high-performance walking shoes.
18
Avia Group International was an Oregon-based athletic shoe company.
19
Ellesse International S.P.A. was an Italian manufacturer of sportswear and casual wear.
Reebok used the company as a distributor in Italy.
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Mergers & Acquisitions, and Strategic Alliances
unit20. These acquisitions enabled Reebok to acquire distribution channels from these
companies. In 1989, Reebok introduced a new ground-breaking product called the
Pump shoe using the Pump® 21 Technology. In the same year, it also initiated Step
Reebok, an international fitness program after conducting comprehensive
biomechanical research22.
Apart from being principally identified with fitness and exercise, Reebok wanted to
get equally involved in sports. In 1992, it created shoes and apparel specifically for
sports like baseball, football, soccer, and track and field events. In the same year, the
company also signed sponsorship contracts with several renowned sportspersons like
Allen Iverson (basketball) and Venus Williams (lawn tennis). Reebok developed a
training program for trained exercisers and beginners in 2000 called Reebok Core
Training. The program was based on physical and athletic treatment focusing on the
quality of movement. Reebok also introduced an adjustable resistant Reebok Core
Board used as a part of the training program to create an extremely effective and
flexible workout.
Reebok entered into a partnership with the National Football League 23 (NFL), USA,
in December 2000 to manufacture, advertise and sell NFL‟s licensed merchandise like
on-field uniforms, sideline apparel, practice apparel, footwear and an NFL-branded
apparel line from the NFL season starting 2002. The 10-year exclusive license gave
Reebok the right to supply merchandise to all the 32 teams and also led to the
introduction of new product categories such as Equipment, 24 and Classics 25.
Reebok entered into a strategic partnership with the National Basketball Association 26
(NBA) in August 2001 for a period of 10 years. This contract gave the company exclusive
rights to design, make, sell, and market certified products such as NBA-branded basketball
shoes, uniforms, shooting shirts, warm-ups, authentic and replica jerseys and practice gear,
headwear, T-shirts, fleece and other apparel for the NBA, Women‟s NB A (WNBA), and
National Basketball Development League (NBDL) teams.
Reebok also entered into a partnership with Indy Racing League 27 (IRL) to be its
official outfitter in February 2002. According to the deal, Reebok created ReebokIndy Racing League apparel for all IRL officials and selected teams and also sported
20
CMI‟s Boston Whaler manufactured and sold power boats for the US government and for
recreational use.
21
Pump® Technology allowed an exact fit with the push of a button. Later the model was enhanced
to create the model Pump 2.0 which did not require shoelaces, did not absorb moisture and could
inflate by itself.
22
Through biomechanical research, Reebok studied the mechanics of a living body, especially
of the forces exerted by muscles and gravity on the skeletal structure. These studies helped it
to follow the movements of athletes during their activities and design various fitness
programs for them to remain healthy.
23
National Football League (NFL) is the largest and most popular professional American
football league comprising 32 teams. It was formed in 1920 as the American Professional
Football Association, and later adopted the NFL name in 1922.
24
Equipments included skates, sticks, helmets, protective equipment for shoulder, shin, elbow,
pants for games such as hockey and football. It also included fitness equipment.
25
Classics have a more contemporary look and appeal. The products included apparel products
such as Gridiron®, Hardwood®, and Traditional Classics®.
26
National Basketball Association (NBA) was founded in New York on June 06, 1946, as the
Basketball Association of America. It is the world‟s premier men‟s professional basketball
league. The name NBA was adopted in 1949.
27
Indy Racing League (IRL) is the promoter of open-wheel racing series in the US and Japan. It
was initially owned by Hulman and Company but was later brought by Tony George in 1994.
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The Adidas – Reebok Merger
its logo on race cars and other publicity programs of IRL. This made Reebok-IRL
products available at all IRL events, via online, and through selected outlets 28.
In January 2002, Reebok initiated a worldwide marketing drive, called the “Sounds &
Rhythm of Sport”. The campaign featured Reebok sponsored NBA, NFL, and tennis
players together with top performers in the music industry. In the same year, Reebok
also launched a product line called “Rbk” which was a collection of street footwear,
apparel and accessories for young men and women who valued style. In 2004, Reebok
made sales of $3.785 billion and profits of $192.4 million (Refer Exhibit V for
financial summary of Reebok) . Its products were available in more than 170 countries.
The major brands were Ralph Lauren, Rockport, Greg Norman (Refer Exhibit VI for
product profile of Reebok).
Exhibit V: Financial Summary of Reebok
Year Ended December 31
(in 000 $ except basic earnings per share and dil uted earnings per share)
Particulars
2004
2003
2002
2001
2000
3,785,284
3,485,316
3,127,872
2,992,878
2,865,240
192,425
157,254
126,458
102,726
80,878
Basic earnings
per share ($)
3.26
2.65
2.12
1.75
1.42
Diluted earnings
per share ($)
3.05
2.43
1.97
1.66
1.40
2,440,628
1,989,742
1,860,772
1,543,173
1,463,046
460,753
353,388
353,454
351,307
358,828
1,219,956
1,033,710
884,570
719,938
607,863
Net Sales
Net Income
Total assets
Long-term debt
Stockholder‟s
equity
Source: Annual Report 2004
Exhibit VI: Product Profile of Reebok International Limited
Product Lines
Brand
Rbk branded footwear, apparel products
and accessories for men and women
Reebok
Slippers, outerwear, hosiery and duty and
work footwear for men, women and kids
Rockport
Traditional Classics, Gridiron,
Hardwood.
Polo Jeans, Polo T-Shirts Company
line and Children‟s line
Polo Sports,
Ralph
Lauren,
Classics
Total Sales In 2004
US $1.65 billion
International
$ 1.54 billion
$377.6 million
***
Dress and casual silhouettes
28
“Indy Racing League Media Relations,” www.racingwest.com, February 21, 2002.
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Mergers & Acquisitions, and Strategic Alliances
Product Lines
Wovens, Play Dry Winterknit Outerwear
and Sweaters collection for women
Hockey equipment and related apparel
Non-Hockey related equipment such as
alpine skiing and equestrian helmets.
***
Brand
Total Sales In 2004
Greg
Norman
Collection
CCM,
JOFA,
KOHO
***
$146 million
Both Ralph Lauren and Greg Norman together had sales of $209.8 million.
Source: www.reebok.com
The Sporting Goods Industry
Mergers and Acquisitions (M&As) had become quite common in the sporting goods
industry during the late 1990s and the early 2000s . Adidas acquired the Salomon
Group for $1.4 billion in 1997. Nike acquired Converse 29 in 2003 for $305 million,
while Reebok acquired The Hockey Company 30 in 2004 for $330 million. These
mergers were prompted by the increasing competition and growth in the industry.
The US market is the largest market for sporting goods. Experts estimate that the US
sporting goods market will grow at a rate of approximately 8.9% between 2004 and
2008 to reach a value of $51 billion, forming 47.6% of the world market. It is estimated
that 33% of the athletic footwear purchased by the US consumers is used for sports and
fitness activities and bought on the basis of price, comfortability and fashion. In 2004,
40% of the consumers of sports apparel lay in the age group 12-24. T-shirts and running
shoes were considered as the top selected categories. In 2004, sports apparel retail sales
in the US were worth $38.8 billion - compared with $37 billion in 2003. Athletic
footwear retail sales were $16.4 billion in 2004, compared with $15.9 billion in 2003.
The key players in the sporting goods industry were Nike, Adidas and Reebok. Nike
and Reebok were the two biggest players in the US athletic footwear and apparel
market controlling about 36% and 12% of the market respectively, while Adidas had a
share of about 9%. Nike controlled about 33% of the global athletic shoe market,
9.6% was controlled by Reebok, while Adidas had 15.4%. (Refer Table I for company
comparison). All the three brands have been competing fiercely in the highly
profitable US market since 1980. Reebok lost its position as market leader to Nike
during 1989-90. Among the other players were New Balance, Fila, and Puma.
Table I: Comparative Position in 2004
Particulars
Year Founded
Headquarters
Adidas
1949
Herzogenerauch,
Germany
Reebok
Nike
1895
1962
Canton,
Massachusetts
Beaverton,
Oregon
29
Converse was a US based shoe company founded in 1908. It went bankrupt in 2001 due to
new competitors who introduced radical designs into the market. Its brands included All
Star Chuck Taylor, Jack Purcell and Heritage.
30
The Hockey Company, a Montreal based company having its operations in Europe, and the
US, is the world‟s biggest designer, manufacturer and marketer of hockey equipment and
related apparel. It had brands like CCM, JOFA and KOHO.
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The Adidas – Reebok Merger
Particulars
Adidas
Reebok
Nike
Employees
17,000
9,102
24,667
Major Brands
Adidas, Salomon,
Mavic, Bonfire,
Arc‟Teryx, Adidas
Golf, Taylormade
Adidas Golf,
Maxfli
Reebok, Reebok
Classic, Rockport,
Rbk, Greg
Norman
Collection, The
Hockey Company
Nike, Nike Golf,
Converse, Cole
Haan, Bauer
Nike Hockey,
Exeter Brands
Group
Hot Product
“Intelligent” shoe
with embedded chip
that conforms for
better support
Rapper Nelly‟s
footwear and
athletic line
coming late 2005
Lance
Armstrong‟s 10/2
apparel line
introduced in
July
US athletic shoe
market share
8.9%
12.2%
36.3%
Global athletic
shoe market
share
15.4%
9.6%
33.2%
Annual Revenue
$7.9 billion
$3.8 billion
$12.3 billion
Annual Net
Income
$326.5 million
$192.4 million
$1.2 billion
Current Market
Capitalization
$8.9 billion
$2.6 billion
$16 billion
Source: Theresa Howard and Kelly Barry, “How Adidas and Reebok stack up against Nike,”
www.usatoday.com, August 04, 2005.
The Boston (U.S.)-based New Balance was founded by William J. Riley (Riley) in
1900s. The company made shoes which helped in correcting orthopaedic foot problems.
It produced Trackster in 1961 which became the first running shoe to feature a rippled
sole with multiple widths. The company was bought by Jim Davis in 1972. The
company sold its products under the brands New Balance, Dunham, PF Flyers, Aravon
and Warrior Lacrosse. The company had sales of $1.5 billion for the year 2004.
The German-based Puma was founded by Rudolf Dassler in the year 1948. The company
was converted into a corporation with its stock offered on the Munich and Frankfurt stock
exchanges in 1986. It was the first sports shoe manufacturer to use the vulcanization
method of production. It offered shoes with SPA technology, Velcro® fasteners, Duoflex
sole and Inspector system made especially for children. The company‟s main brands are
Puma and Tretorn, distributed across 80 countries. Puma has endorsement deals with
popular sportsperson like Serena Williams (lawn tennis), Michael Schumacher (formula
one/auto race), Travis Pastrana (motor car race), and Vince Carter (basketball). Puma
recorded sales of €1,530.3 million and profits of €257.3 million for the year 2004.
The Merger
According to the merger deal, Adidas would buy all the outstanding shares of Reebok
at $59 per share in cash. This price represented a premium of 34.2%, as per the
closing share price of $43.95 on August 02, 2005. Adidas proposed to fund the
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Mergers & Acquisitions, and Strategic Alliances
purchase through an arrangement of debt and equity. The deal price was equal to the
latest twelve month sales of Reebok and 11.7 times its EBITDA 31. Some analysts felt
that the deal was priced too high. As Uwe Weinrich, an analyst at HVB Group 32
remarked, “The price Adidas will pay for Reebok is ambitious.” 33 He added that
acquisitions in the sporting goods industry rarely brought in good returns.
However, Adidas expected that the merger would make it stronger and would enhance
its shareholder value. Hainer said, “We see a lot of benefits in combining these two
powerful companies. They both have strong identities and heritage, yet they
complement each other very well” 34. Hainer also said that the deal was not strictly
about dethroning Nike.
The merger was subject to approval by the shareholders of Reebok, the European Union
and the US Federal Trade Commission. Fireman and his wife Phyllis, who collectively
owned about 17% of Reebok‟s outstanding shares, agreed to vote their shares in favor of
the transaction. Adidas expected to close the transaction in the first half of 2006.
The Synergies
Both the companies claimed that their missions were complementary. As Fireman
remarked, “Adidas is a perfect partner for Reebok. Reebok‟s mission is to enroll global
youth inclining towards the music-and-lifestyle image that it promotes through sports,
music and technology. This complements Adidas‟s mission to be the leading sports brand
in the world, with a focus on performance and international presence.” (Refer Exhibit VII
for mission statements of Adidas and Reebok).
Exhibit VII: Corporate Mission of Adidas
Adidas-Salomon strives to be the global leader in the sporting goods industry with
sports brands built on a passion for sports and a sporting lifestyle.
We are consumer focused. That means we continuously improve the quality,
look, feel and image of our products and our organizational structures to match
and exceed consumer expectations and to provide them with the highest value.
We are innovation and design leaders who seek to help athletes of all skill
levels achieve peak performance with every product we bring to the market.
We are a global organization that is socially and environmentally responsive,
creative and financially rewarding for our employees and shareholders.
Contd…
31
EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortization.
EBITDA is an approximate measure of a company‟s operating cash flow. This measure is of
interest to creditors as it is an indication of the income a company has free of interest
payments.
32
HVB Group is one of the five biggest banks in Europe and is the second largest quoted bank
in Germany. It has 2,062 branch offices with core markets in Germany, Austria and Central
and Western Europe. Its main businesses include European retail and mid-cap customer
business supplemented by customer-oriented capital market activities.
33
“Adidas Paying $3.8 Billion for Reebok,” www.smartmoney.com August 03, 2005.
34
“Reebok Transaction and First Half Year Results 2005 Financial Results Presentation,”
www.adidas-salomon.com, August 03, 2005.
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The Adidas – Reebok Merger
Contd…
We are committed to continuously strengthening our brands and products to
improve our competitive position and financial performance.
In the medium term, we will extend our leading market position in Europe,
expand our share of the US footwear market and be the fastest growing major
sporting goods supplier in Asia and Latin America. The resulting top-line
growth, together with strict cost control and working capital improvements,
will drive over-proportionate earnings growth.
Source: www.adidas-salomon.com
Corporate Mission Statement of Reebok
Reebok is a true partner with its customers and is relentlessly committed to their
success. Built on a foundation of trust, listening and innovation, we are our
customers‟ most valued resource for quality products and information and the
leading authority in sports and fitness.
Our purpose is to ignite a passion for winning, to do the extraordinary, and to
capture the customer‟s heart and mind. Reebok has a fun, energetic culture driven
by the value we place on people, our greatest asset. We embrace diversity in its
fullest sense. We act with integrity and operate through confident, empowered
teams. With courageous leadership, we stay focused on what is most important to
our customers. We have a deep-felt commitment to operate in a socially
responsible way and we stand for human rights throughout the world.
We are committed to excellence and innovation in everything we do. We
demonstrate our excellence by setting exceptional performance standards, which
we then achieve through focused perseverance and vigorous execution. Innovation
and magical ideas drive our company to create powerful breakthrough products and
inspirational marketing and advertising.
Our passion for winning creates our possibilities. We harness the boundless
creative energy of every individual to make the differences that count – to captivate
the consumer and create an exceptional global brand and organization.
We make a difference:
To our customers
To our employees
To our shareholders
To our athletes
And to the world in which we live.
Source: www.ruggedelegantliving.com
Post-merger the merged entity expected to improve its financial performance. As
Hainer said, “The combined group would gain cost savings and operating
improvements of €125 million through back-office synergies which would be realized
by financial year 2008.”35 The merged entity would be able to utilize economies of
35
“Reebok Transaction and First Half Year Results 2005 Financial Results Presentation”
www.adidas-salomon.com August 03, 2005.
285
Mergers & Acquisitions, and Strategic Alliances
scale. It would be able to concentrate on certain key issues and gain synergies in sales,
distribution and information. “I see the synergies very quickly outweighing the
costs,”36 said Robin Stalker, Chief Financial Officer, Adidas.
The companies felt that the major driving force behind the merger was greater sales
growth rather than just cost savings. The annual sales of the combined group after
merger was predicted to be $11.7 billion. Fireman noted that post merger, the merged
entity would be in a better position to compete with Nike, which had sales of $12.3
billion in 2004 (Refer Exhibit VIII for financial summary of Nike).
Exhibit VIII: Financial Summary of Nike
Year Ended May 31
(in mn $ except basic earnings per share and diluted earnings per share)
Particulars
Net Sales
2004
2003
2002
2001
2000
12,253.1
10,697.0
9,893.0
9,488.8
8,995.1
945.6
474.0
663.3
589.7
579.1
Basic earnings
per share ($)
3.59
2.80
2.50
2.18
2.10
Diluted earnings
per share ($)
3.51
2.77
2.46
2.16
2.07
7,891.6
6,821.1
6,4443.0
5,819.6
5,856.9
682.4
551.6
625.9
435.9
470.3
4,781.7
3,990.7
3,839.0
3,494.5
3,136.0
Net Income
Total assets
Long-term debt
Stockholder‟s
equity
Source: Annual Report 2004
Adidas had only an 8.9% share of the US market. Although the company was doing
well in Europe and Asia, it was not making much progress in North America
compared with Reebok. (Refer Table II for comparison of geographic sales of Adidas
and Reebok). The acquisition was expected to give the company‟s products a strong
push in the US market because of the link with Reebok.
Table II: Geographic Sales Comparison of Adidas and Reebok for 2004
Adidas
Sales (in mn €)*
Reebok
Sales (in mn $)
Europe
3,470
US
2,069
North America
1,486
UK
475
Asia
1,251
Europe
810
224
Others
431
Latin America
Source: Annual Reports of Adidas and Reebok
* 1€ = $1.3621 on December 31 2004.
36
Reuters, “Adidas to Buy Reebok for $4bn,” www.eonomictimes.indiatimes.com, August 04,
2005.
286
The Adidas – Reebok Merger
John-Paul O'Meara of Dresdner Kleinwort Wasserstein 37 said that the move was good
for the long term and would enable Adidas to attain “critical mass” in the U.S. market.
He further added, “Reebok‟s strength is in major U .S. sports such as basketball, and
not soccer, which is the strength of Adidas.” 38 With the acquisition, Reebok would
gain a large presence in Europe and Asia with the help of Adidas. This would make
the combined company hold about a fifth of the sports apparel market worldwide.
Another advantage analysts noted was that the combined company would have more
bargaining power in dealing with suppliers and retailers. As Gavin Finlayson (Finlayson)
of Commerzbank39 said, “Adidas, in conjunction with Reebok, has the potential to say,
„We want better terms or conditions or we‟ll take our business elsewhere.” 40
The bigger size of the merged entity would enable it to negotiate prices with
manufacturers, secure shelf space at retail outlets, and increase sponsorships and
endorsements, especially in Asia and the US. George Whalin (Whalin), president at
Retail Management Consultants 41 said, “When companies consider a merger like this,
they look at big sporting goods retailers – Sports Authority, Foot Locker, Dick‟s – and
try to determine the amount of space and prominence of displays they can get.
Owning Reebok greatly enhances the in-store position and leverage for combined
promotions. It‟s a big deal.”42
Post merger the companies would also have a stronger distribution network. Whalin pointed
out that with the deal, Reebok would have access to Adidas‟ globally spread distribution
network and Adidas would have a stronger distribution network in North America.
Adidas and Reebok would be able to accelerate development of innovative products
and product lines in footwear, apparel, and hardware by exploiting R&D expertise
together. Adidas had developed state-of-the-art technologies such as Adidas_1 43,
A3®44 and ClimaCool45. Reebok, on the other hand, had product innovations including
the Pump 2.0 46 and DMX47. This portfolio of innovative products was expected to
increase consumer demand across all brands.
37
38
39
40
41
42
43
44
45
46
The investment banking arm of the German retail bank Dresdner Bank owned by Allianz
Group. It mainly operates from its European bases in London and Frankfurt. It has 30
worldwide offices and is renowned for its expertise in the debt capital markets.
Jennifer Letki, “Adidas to Buy Reebok; 2Q Net Profit Rises 50%,”
www.news.morningstar.com,
August 03, 2005.
Commerzbank AG is Germany‟s third-largest bank after Deutsche Bank and HypoVereins bank.
Jennifer Letki, “Adidas to Buy Reebok; 2Q Net Profit Rises 50%,”
www.news.morningstar.com, August 03, 2005.
A California-based consultancy found by George Whalin which provides business-building
services to retail companies and industry suppliers across North America.
Laura Petrecca and Theresa Howard, “Adidas-Reebok Merger Lets Rivals Nip at Nike‟s
Heels,” www.usatoday.com, August 04, 2005.
Adidas_1 was called the world‟s first intelligent shoe. It was a shoe which could sense and
understand each and every step with changes in speed and surface conditions through a
microprocessor. It was developed to get a perfect level of cushioning at all times.
A3® uses the Energy management technology using the polyurethane components which
helps in efficient cushioning. It uses the Torsion system for giving stability and control to
the midfoot. The technology enables maximum possible shock absorption.
ClimaCoolTM is a technology that uses fabrics and ventilation systems to keep a person cool,
dry and comfortable during a workout.
Pump 2.0 was an advancement of the Pump® Technology used by Reebok. The athletic
shoes were self inflating and self regulating, providing the consumer with a custom fit.
287
Mergers & Acquisitions, and Strategic Alliances
As far as sports sponsorships were concerned, analysts felt that the deal would allow
Adidas to have access to Reebok‟s licenses in the NFL and NBA in the US, as it had a
substantial share in the US market and had supply deals with all the major sports
leagues. As Hainer remarked, “This portfolio will present us in all the major sport
categories around the world. Reebok is extremely strong in the American sports like
NFL, NBA - and Adidas is very strong in the FIFA World Cup, the Olympic Games
and the European Champions League. They are strong in America; we are strong in
Asia and Europe.”48 (Refer Exhibit IX for sponsorship deals).
Exhibit IX: Top Sponsorship Deals of Adidas, Reebok and Nike
Particulars
Adidas And Reebok
Nike
Sports
Football, Basketball, Cricket, Soccer,
Athletics, Hockey, Golf, Tennis,
Rugby
Soccer, Basketball,
Golf, Athletics,
Cycling
Confederations
UEFA Champions LeagueTM, NFL,
NBA, NHL, MLB, MLS, more than 20
Olympic Committees, New Zealand
All Blacks, World XI Team
Brazil Soccer,
Manchester United
(Soccer)
Teams
Real Madrid, Milan AC, Bayern
Munich, Liverpool FC, Australian
National Cricket Team, New York
Yankees
St. Louis Cardinals
1 B, San Diego
Chargers, Chicago
Bears, Minnesota
Twins, Pittsburg
Stealers
Events
2006 FIFA World CupTM, Beijing 2008
Olympics, Australian Open Tennis
Tournament, Rugby Union, US Major
League Soccer
Athletes/players
David Beckham (soccer)
Tracy McGrady (basketball)
Yao Ming (basketball)
Rahul Dravid (Cricket)
Allen Inverson (basketball)
Mahendra Singh Dhoni (Cricket)
Tiger Woods (golf)
LeBron James
(basketball)
Michael Jordan
(basketball)
Lance Armstrong
(bicycle racer)
Alicia Molik (tennis)
Matt Giteau (rugby)
Lote Tuqiri (rugby)
Andre Agassi (tennis)
Kevin Garnett (basketball)
47
DMX is a technology used by Reebok for shoe cushioning which gave strong support to the
heel. The shoes were more popular with runners than with other sportspersons.
48
Associated Press, “Adidas to Buy Reebok for $3.8 Billion,” www.forbes.com, August 03,
2005.
288
The Adidas – Reebok Merger
Particulars
Endorsements
(Entertainment)
Adidas And Reebok
Nike
Missy Elliott (rapper)
Christina Ricci (actress)
Lucy Liu (actress)
Mary J. Blige (singer)
Eve (rapper)
Jay-Z (rapper)
50 Cent (rapper)
Nelly Furtado (singer)
Source: Compiled from various sources
Adidas was being promoted by celebrities like David Beckham (Soccer player), Andre
Agassi (tennis player), and Missy Elliott (rapper). Reebok used Yao Ming (basketball
player), Allen Iverson (basketball player), Jay Z (rapper), 50 Cent (rapper) and Nelly
Furtado (singer) to revitalize its youth appeal. According to analysts, Adidas would
benefit hugely from using Reebok endorser Yao Ming to further expand its business in
China. Hainer said, “Yao is with Reebok at the moment, but there may be a time when
he will be helpful for both brands.” 49
Integration Issues
Adidas said the companies would grow as a combined entity but would retain separate
management. The companies also ruled out any workforce reductions. The new entity
would continue to have separate headquarters and their individual sales forces.
The companies would also keep most of the distribution centers independent and
would have separate advertising programs for their brands. Hainer said, “The brands
will be kept separate because each brand has a lot of value and it would be stupid to
bring them together. The companies would continue selling products under respective
brand names and labels.” 50 Adidas declared that the deal would involve investment in
both Adidas and Reebok. These investments would guide the companies towards
effective consolidation.
Some analysts warned that repositioning the two brands would be a difficult exercise.
As John Barker, president, DZP Marketing Communications said, “The real challenge
is in marketing brands which are indeed competitors. The real danger may be in trying
to reposition one brand or another to not compete. ... Both brands could be diluted in
the process.” 51 Analysts were concerned that Adidas would have to support two
separate brand identities when rival Nike was intensely focused on a single identity
represented by the „Swoosh‟ logo (Refer Exhibit X for the logos of Adidas, Reebok
and Nike). “Most people probably don't know what the Adidas logo looks like. But
49
“Adidas C.E.O. Herbert Hainer & Reebok C.E.O. Paul Fireman Share Their Game Plan,”
www.finance.lycos.com, August 08, 2005.
50
Press Release “Reebok Transaction and First Half Year Results 2005 Financial Results
Presentation,” www.adidas-salomon.com, August 03, 2005.
51
Laura Petrecca and Theresa Howard, “Adidas-Reebok Merger Lets Rivals Nip at Nike‟s
Heels,” www.usatoday.com, August 04, 2005.
289
Mergers & Acquisitions, and Strategic Alliances
everybody knows what the Swoosh is. It's a tough problem they face and I don't see
how Reebok helps Adidas with that problem” 52, said Jack Trout, a veteran sports and
marketing consultant. However, marketing guru, Al Ries, (Ries and Ries Consulting)
felt that Adidas would in fact get strong leverage with Reebok. He remarked, “Short
term, there are going to be problems putting the two brands together. But in the long
term, Adidas will be strengthened.” 53
Exhibit X:
The Swoosh Logo of Nike
Source: www.nike.com
The Three Stripes Logo of Adidas
Source: www.adidas-salomon.com
Contd...
52
William McCall, “Double-Teaming the „Swoosh‟,” www.signonsandiego.com, August 20,
2005.
53
The Merger of Titans, November 2005, Effective Executive, IUP India.
290
The Adidas – Reebok Merger
Contd...
Reebok Logo
Source: Google Images/ www.fitness-equipment.uk.com
The Track Ahead
Analysts had varied opinions about the deal. Some analysts felt that Adidas could beat
Nike to become the industry leader. Al Ries said that, “The biggest benefit is that it
removes a competitor. Now, all they need to do is to focus all their efforts on
competing with Nike.”54 However, a few analysts opined that it was impossible to
dislodge Nike from its No. 1 position. Nike was a preferred brand because of its
fashion status, colors, and combinations. Although Adidas was perceived to have
good quality products that offered comfort and Reebok was perceiv ed as a „cool‟
brand, Nike was perceived as having both „hipness‟ and quality. Nick Liddell,
director, brand valuation at Interbrand55 said, “Nike is a much focused brand, based on
sporting excellence and product innovation, linking both sportswear and urban life
wear.”57
Analysts Hans-Peter Wodniok, a partner at Fairesearch 56 noted that Adidas did not
have a good track record with bigger acquisitions. He said, “Salomon was a flop. ... I'd
like more details on what's going to happen after the deal (with Reeb ok) is closed.”57
Wodniok added that to make the acquisition a success, “radical change” would be
needed. Adidas had stated that the divestment of Salomon in May 2005 was
undertaken in order for Adidas to concentrate on its strengths in the athletic footwear
and apparel market and the growing golf market.
Some analysts noted that the deal would give Adidas an advantage only in the U.S.
market. Joerg Frey, analyst, Sal Oppenheim 58 said, “We are skeptical because the deal
54
The Merger of Titans, November 2005, Effective Executive, IUP India.
55
Interbrand Corporation is a global branding consultancy offering services in brand strategy,
corporate identity, and name development.
56
Fairesearch, is an independent research company for institutional investors, banks and
brokers, founded in 2003.
57
News Snap, “Adidas to Buy Reebok; 2Q Net Profit Rises 50%”, www.news.morningstar.com,
August 03 2005.
58
It is one of the leading private banks in Europe established in 1789. Its core business areas are
Asset Management and Investment Banking. It is headquartered in Vienna and earned
€157million in fiscal 2004.
291
Mergers & Acquisitions, and Strategic Alliances
is driven by US expansion plans and of fer few synergies.”59 “If they really try to
operate the two brands the same way they have been – competing with each other –
there‟s not a heck of a lot of synergy there,” said Matt Powell, senior contributing
editor at Sports Executive weekly. 60 Experts said that the two companies were
adopting a defensive strategy by joining together. As Finlayson said, “The message
Adidas is making is „We can‟t cut it alone in the US‟,” noting that there would be
little by means of production synergies. 61
There are possibilities of mergers happening in the sporting goods industry in the
future considering the merger between Adidas and Reebok. Analysts remarked that it
was improbable that Nike would launch a rival bid for Reebok. However, experts did
not rule out the possibility that Nike could instead be lured to acquire another German
rival, Puma.
59
Reuters, “Adidas to Buy Reebok for $4bn,” www.eonomictimes.indiatimes.com, August 04,
2005.
60
Helen Jung, “Adidas + Reebok = Contender,” www.oregonlive.com, August 04, 2005.
61
Jennifer
Letki,
“Adidas
to
Buy
Reebok;
www.news.morningstar.com, August 03, 2005.
292
2Q
Net
Profit
Rises50%,”
The Adidas – Reebok Merger
Additional Readings & References:
1.
Adidas agrees to buy rival Reebok , www.news.bbc.co.uk, August 11, 2005.
2.
Reuters „Sales growth, not cost cut, united Adidas,
www.economictimes. indiatimes.com, August 11, 2005.
3.
After Reebok-Adidas
www.usatoday.com,
August 09, 2005.
4.
Darren Rovell, Reebok Adidas have plenty of issues to solve ,
www.ESPN.com,
August 03, 2005.
5.
Press Release, Adidas-Salomon to combine with Reebok and create €9
billion footprint in global athletic footwear, apparel and hardware
markets, www.adidas-salomon.com, August 03, 2005.
6.
Press Release, “Reebok Transaction and First Half Year Results 2005
Financial Results Presentation”, www.adidas-salomon.com, August 03,
2005.
7.
Adidas buys Reebok, www.prepstars.com, August 03, 2005.
8.
Steve Goldstein,
Adidas
www.smartmoney.com,
August 03, 2005.
9.
Oren Harari, Intangible Adidas, www.harari.com, August 09, 2005.
deal,
US
shoemaking
paying
$3.8
hangs
billion
by
for
Reebok‟ ,
a
lace ,
Reebok ,
10.
Daisuke Wakabayashi, Adidas, Reebok eye sales growth, not just cuts ,
www.business.com, August 10, 2005.
11.
William Spain, Merger puts Nike in rival‟s sights, www.cbs.marketwatch.com,
August 03, 2005.
12.
Adidas holds takeover talks with U.S. rival
www.centerformarketintelligence.com, August 02, 2005.
13.
Ben Richardson, Adidas bid raises image concerns , www.noozy.net, August
03, 2005.
14.
Three stripes and you‟re out as rivals target Adidas design , www.ft.com,
July 04, 2005.
15.
Associated Press,
www.forbes.com,
August 14, 2005.
16.
Associated Press, Reebok CEO Paul Fireman at a glance, www.forbes.com,
August 14, 2005.
17.
Laura Petrecca and Theresa Howard, Adidas-Reebok merger lets rivals nip
at Nike‟s heels, www.usatoday.com, August 04, 2005.
18.
Jennifer Letki, Adidas to buy Reebok; 2Q net profit rises 50% ,
www.news.morningstar.com, August 03, 2005.
19.
Helen Jung, Adidas + Reebok = Contender , www.oregonlive.com, August
04, 2005.
20.
Stefan Nicola, Analysis: Adidas to challenge Nike , www.wpherald.com,
August 04, 2005.
Buyout
long
time
coming
for
Reebok-
Reebok
FT,
CEO ,
293
Mergers & Acquisitions, and Strategic Alliances
21.
Two shoes firms merge while a third thrives , www.billwallacesports.com
22.
Associated Press, Sportswear
www.wvtsam950.com
23.
Jennifer King, Adidas + Reebok = Foot stompin‟ new market share,
www.ruggedelegantliving.com, August 03, 2005.
24.
Parija Bhatnagar, Cheaper sneakers on the way? www.money.cnn.com,
August 04, 2005.
25.
Reuters,
Adidas
to
buy
www.economictimes.indiatimes.com,
August 04, 2005.
26.
David Kiley, Reebok and Adidas: a good fit , www.businessweek.com,
August 03, 2005.
27.
www.adidas-salomon.com
28.
www.reebok.com.
29.
www.centerformarketintelligence.com
30.
www.moneycentral.com
31.
www.answers.com
32.
www.forbes.com
33.
www.grainmarketresearch.com
34.
www.uk.finance.yahoo.com
35.
www.geocities.com
36.
www.today.reuters.com
37.
www.bigcharts.marketwatch.com
38.
www.finance.yahoo.com
39.
www.sgma.com
40.
www.aberdeen.com
294
maker
Adidas
Reebok
to
for
Reebok,
buy
$4
bn ,