The Adidas – Reebok MergerThe 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 2 3 4 5 6 Darren Rovell, “Reebok, Adidas Have Plenty of Issues to Solve,” www.ESPN.com, August 03 2005. Press Release, www.adidas-salomon.com, August 04, 2005. The Merger of Titans, November 2005, Effective Executive, IUP India. Ries and Ries is a business consultancy, based in Atlanta, Georgia. Laura Petrecca and Theresa Howard, “Adidas-Reebok Merger Lets Rivals Nip at Nike‟s Heels,” www.usatoday.com, August 04, 2005. NPD group founded in 1967 provides sales and marketing information such as consumer trends, sales and marketing information for a diverse range of industries. 275 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. 276 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 Reichsmark7. 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 8 9 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. 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. 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. 277 Mergers & Acquisitions, and Strategic Alliances Horst died in 1987. In 1990, Bernard Tapie10 (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 Frankfurt13 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 11 12 13 14 15 Tapie was a minister of Urban Affairs in the French Government and he was well-known for rescuing bankrupt companies. Credit Lyonnais is a French bank founded in 1863 by Henri Germain. The Paris Stock Exchange is the second largest stock exchange in Europe. It is called as “La Bourse de Paris”. It is a part of Euronext, a European Stock Exchange with subsidiaries in Belgium, France, Netherlands, Portugal and United Kingdom. The Frankfurt Stock Exchange is located in Frankfurt, Germany. It is called the “Deutsche Borse” and is the largest of eight German exchanges. 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. DAX is an acronym for Deutscher Aktienindex. It is a German stock performance index that tracks the performance of 30 top German stocks. 278 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 17 18 19 African gazelles are small, swift antelopes characteristically having a slender neck and annulate horns. Rockport Company manufactured high-performance walking shoes. Avia Group International was an Oregon-based athletic shoe company. Ellesse International S.P.A. was an Italian manufacturer of sportswear and casual wear. Reebok used the company as a distributor in Italy. 279 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 Classics25. Reebok entered into a strategic partnership with the National Basketball Association26 (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 NBA (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. 280 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 diluted 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. 281 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 Company30 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 29 30 Adidas 1949 Herzogenerauch, Germany Reebok Nike 1895 1962 Canton, Massachusetts Beaverton, Oregon 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. 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. 282 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 283 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 EBITDA31. 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 32 33 34 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. 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. “Adidas Paying $3.8 Billion for Reebok,” www.smartmoney.com August 03, 2005. “Reebok Transaction and First Half Year Results 2005 Financial Results Presentation,” www.adidas-salomon.com, August 03, 2005. 284 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 Consultants41 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_143, A3®44 and ClimaCool45. Reebok, on the other hand, had product innovations including the Pump 2.046 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 48 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. 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 50 51 “Adidas C.E.O. Herbert Hainer & Reebok C.E.O. Paul Fireman Share Their Game Plan,” www.finance.lycos.com, August 08, 2005. Press Release “Reebok Transaction and First Half Year Results 2005 Financial Results Presentation,” www.adidas-salomon.com, August 03, 2005. 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 53 William McCall, “Double-Teaming the „Swoosh‟,” www.signonsandiego.com, August 20, 2005. 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 perceived 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 Fairesearch56 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 Reebok) 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 Oppenheim58 said, “We are skeptical because the deal 54 55 56 57 58 The Merger of Titans, November 2005, Effective Executive, IUP India. Interbrand Corporation is a global branding consultancy offering services in brand strategy, corporate identity, and name development. Fairesearch, is an independent research company for institutional investors, banks and brokers, founded in 2003. News Snap, “Adidas to Buy Reebok; 2Q Net Profit Rises 50%”, www.news.morningstar.com, August 03 2005. 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 offer 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 60 61 Reuters, “Adidas to Buy Reebok for $4bn,” www.eonomictimes.indiatimes.com, August 04, 2005. Helen Jung, “Adidas + Reebok = Contender,” www.oregonlive.com, August 04, 2005. Jennifer Letki, “Adidas to Buy Reebok; 2Q Net Profit Rises50%,” www.news.morningstar.com, August 03, 2005. 292 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, Buyout long time coming for Reebok CEO, 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. Reebok- FT, 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 buy Reebok, $4 bn,