CASE- STUDY

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.

Issues
» The recent trends and structure facing the sporting goods industry
» The reasons for the ongoing mergers and acquisitions in the industry and its future
» The rationale behind the Adidas and Reebok merger
» Whether the merger will be successful in the long-term

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. The deal would result in the union of two cutthroat competitors
through a "friendly takeover".

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’s brand. However, some analyst had doubts about the success of
the merger of the companies.

They cited that the merger that 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 Nick. They felt that
the combined entity would have to work really hard to further expand its market share in the US
market and globally

ADIDAS (BACKGROUND)
The story of Adidas dates back to the year 1920 when Adolf Dazzler (Adi) produced a handmade
shoe fitted with black spikes. On July 01, 1924, Adi and his brother Rudolf Dazzler (Rudolf)
started a company under the name "Dazzler Brothers OHG".

In the year 1927, the company enhanced its capacity by taking on a new factory on lease. The
company's shoes made their debut at the 1928 Olympics in Amsterdam. In 1930, the brothers
purchased the factory and named it "Dazzler Brothers Sports Shoe Factory." The company
introduced tennis shoes in 1931. In the year 1935, the turnover of the company exceeded 400,000
Reichsmark.3 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 Dazzler. Adi registered the "Three Stripes"4 as his
official logo. Rudolf set up another sporting goods company named Puma.

In 1956, Adi's son Horst Dazzler (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 Game help 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; “Achilles” in 1968 .The “Trefoil Logo” was
introduced in 1972. The essential feature of the logo was three leaves representing the Olympic
spirit, joining the three continental plates.

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 in 2003 for $305 million, while Reebok acquired The Hockey
Company 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, comfort ability 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 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 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 it’s EBITDA. Some analysts felt that the deal was priced too high. As Uwe Weinrich, an
analyst at HVB Group remarked, "The price Adidas will pay for Reebok is ambitious." He added
that acquisitions in the sporting goods industry rarely brought in good returns…

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 enrol global youth inclining to words the music-and lifestyle image that it
promotes through sports, music technology.

This complement Adidas’s mission to be the leading sport brand in the world, with a focus on
performance and international presence…

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 centres independent and would have
separate advertising programs for their brands. Haines 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."
Adidas declared that the deal would involve investment in both Adidas and Reebok. These
investments would guide the companies towards effective consolidation.

THE TRACK AHEAD

Analysts had varied opinions about the deal. Some analysts felt that Adidas could beat Nike to
become the industry leader. Al Rise 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."
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, colours, and combinations. Although
Adidas was perceived to have good quality products that offered comfort and Reebok was
perceived as a 'cool' brand, Nike was perceived as having both 'hipness' and quality...

ADIDAS CORE COMPETENCIES

 Technology

 Customer Focus

 Brand Recognition

 Supply Chain

 Collaboratively Competitive

REEBOK CORE COMPETENCIES

 Trend Identification

 Ability to Market to a Niche Segment

 Women’s Shoe Design

 Celebrity Relationships

COMBINNG CORE COMPETENCIES

 Adidas Technology with Reebok Design

 Adidas Sports with Reebok Woman’s Market

 Adidas Shoes with Reebok Apparel

  Adidas Global Strength Reebok US Strength

IMPLEMENTATION
 Blending The Cultures Successfully

 Protect The Strengths of Acquired Company

 Maintaining Both Brands

 Capitalising On supply Chain Economies of Scale

 Nurturing the Partnership Between Technology and Design

SWOT ANALYSIS
ADIDAS- SOLOMON (BEFORE THE MERGER)
Adidas- Solo man was a leading player in the sports good manufacturing company.

STRENGTHS
 Leading Player in The Sporting Goods Industry

 Steady Increase in Sales Revenues

 Successful New Product Innovations

 Lead time Improvements

 Marketing Strength

WEAKNESSES
 Unfocused Strategy

 Own –Dependence on Adidas Brand Segment

 High Level of Long Term Borrowings

 Order Cancellations

OPPOPTUNITIES
  Strategies Acquisitions and agreements

 Supply-chain and manufacturing initiatives

 Own retail Stores

THERATE
 Competition With Company’s Traditional

 Competition Like Reebok, Nike, Puma

 Freeing Exchange Fluctuations

 Weak Global Economy

 Impact of Scandals in the US and Germany

REEBOK SWOT ANALYSIS (BEFORE THE MERGER)

Reebok international was a major player in the sports and fitness products market, with a
particular emphasis on footwear its main strengths lied in its size and strong brand awareness

STRENGTHS
 Growing Sales Revenue

 Excellent Marketing Strategy

 Celebrity Associated Sponsors ships

 Strong Women’s Sector

WEAKNESSES
 Classics Under Fire

 Low Market Share in Apparels

 Danger of Stockpiling Products by Retailers

OPPORTUNITIES
  Increase Average Shoe Price

 Draw Attention to Word New Technological Developments

 Encourage a Strong Brand Push in Europe

 Exploit Nike’s Lack of High Profile

THREATS
 Owr Reliance on Footwear Sales

 Diverted From Historical Markets

 Potentially Expensive New Product Marketing

ADIDAS-REEBOK SWOT ANALYSIS

(AFETER THE MERGER)

STRENGTHS
 More Products for Different Customers

 Increase in Product Line

 Acclivity in Market Share

 New both upper ade middle priced market are covered

 Shared R&D, Patents ,Technology Innovations

WEAKNESSES
 Differing Values Among Managements

 Complexity of joining two corporate cultures

 Both Companies Belong to Different Countries

OPPORTUNITIES
 Reduction in Costs
  Decreased Competition

 Cross-owr Promotion by Sponsored Athletes

 Enter to new market /segments

THREATS
 Nike

 Nike Possible Acquisition of Puma

 Danger of Cannibalisation Between the Two Separate Brands

POST MERGER PERFORMANCE

7th march, 2007- Adidas groups motto is “IMPOSSIBLE IS NOTHING” But since the No.2
sporting goods market announced in August, 2005, that it would snap up rival Reebok for $3.8
billion to gain a firmer footing in the U.S. and challenge market leader that the combo will work

True to its mantra , however ,Adidas says its racing flat-out to make its tie- up with Reebok
brand to widen its appeal “our focus this year will be on getting Reebok back onto a growth
track,” Adidas chief fexecubiw herbert hainer said time , but were moving in the right direction”

The company says expects these efforts to increase sales of the Reebok brand this year in the
low- single- digit “range. Adidas expects its gross margin in 2007 to be between 45%and 47%,
thanks to “improvements in all three brand segment” for the group, the company expects sales in
2007 to grow in the “mid-single-digit “range.