Abstract:

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

Contents:

  Page No.
Introduction 1
Background Note 2
The Sporting Goods Industry 6
The Merger 8
The Synergies 8
Integration Issues 11
The Track Ahead 12
Exhibits 14

Keywords:

Adidas-Salomon AG, Reebok International Limited, Nike International Inc., Mergers and Acquisitions (M&As), US, Germany Federal
Trade Commission, Financial Performance, Bargaining Power, Distribution Network, Integration Issues, Footwear and apparel market,
Interbrand, Ries and Ries Consulting, Merged entity, Market Capitalization, Synergies, Herbert Hainer and Paul Fireman.

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 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.
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.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 Dassler. 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 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 1961and started
manufacturing track suits in 1962. 

The company launched its first jogging shoe

called, "Achille" 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...
EXCERPTS

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,
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 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 its 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 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"...

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."
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 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."
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 perceived as a 'cool' brand, Nike
was perceived as having both 'hipness' and
quality...

Exhibits

Exhibit I: Share Price Movement of Adidas-Salomon AG, August 2005

Exhibit II: The Three Stipes Logo of Adidas
Exhibit III: Product Profile of Adidas-Salomon AG
Exhibit IV: Financial Summary of Adidas
Exhibit V: Financial Summary of Reebok 
Exhibit VI: Product profile of Reebok International Limited
Exhibit VII: Corporate Mission of Adidas
Exhibit VIII: Financial Summary of Nike
Exhibit IX: Top Sponsorship Deals of Adidas, Reebok and Nike
Exhibit X: The Swoosh Logo of Nike