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I.

Introduction
Mergers and acquisitions have developed to be a widespread occurrence in modern era. Giorgio Armani Group, a prospect business of Adidas AG, is one of the leading fashion and luxury goods groups in the world today. It designs, manufactures, distributes and retails fashion and lifestyle products. -------------------------------

II. Statement of the Problem


Due to declining pattern of the financial performance of Adidas AG, and to new opportunities and threats that arise for rival firms in the industry, the company needs a clear three-year strategic plan to compete effectively to its competitors. A strategy to take into consideration is the alliance with Armani to create a special collection for the ultimate activewear concept. Hence, Adidas AG is concerned if it would be wise for the company to acquire The Armani Group, which is one of the leading fashion and luxury goods group in the world.

III. Case Facts


1. Adidas AG Mission Adidas AG is committed to being a global leader in the sporting group industry by producing brands that are novel, fun, have a passion for athletics and active people worldwide. We are committed to delivering industry leading financial results, innovating the most advanced products, focusing on our consumers, and maintaining all of this while being a good corporate citizen. 2. Adidas AG Main Divisions Adidas Among the three divisions, it was the one with the best performance in terms income earned. It is committed to providing the most technological and advanced sportswear. It produces an assortment of products for tennis, running, basketball, football, and other sports. It has two primary divisions: Sports Performance Division which focuses mostly on athletes and Sport Style Division which is targeted at the youth and fashion minded people. Reebok It was rooted on womens sports and fitness by it already expanded into mens fitness. Its vision is: fulfilling and leading through creativity. And its purpose is, being committed to corporate responsibility and enabling the youth around the world to fulfill their potential through producing great and innovative products and through Reeboks

Human Rights Program that aids underprivileged youth around the world meet their potential and maintain an active and healthy lifestyle. TaylorMade It is the world leader in metalwood suppliers. Its focus is golf products such as golf gloves, hats, shoes, balls and other apparel. It became the second in the golf industry in 2006. 3. Financial Information Adidas AG derives its revenues 45% on footwear, another 45% on apparel, and the remaining 10% on hardware. In the year 2008 to 2009, it derived more income in Asia than North America. There is also large portion of goodwill in its assets and large of long term debt in its total liabilities which is bad in the future if their revenues will continue to decline. 4. External Issues The global economy has a great impact on companies because they derive their revenues from the public and if the economy is bad, people will tend to lessen their consumption especially of luxury goods which are not needed in daily life. These economic issues include currency rates, consumer discretionary spending, unemployment rates, tax rates, restricted credit and much more. According to the survey, most of the retail industry will continue to suffer from reduced sales in the continuing years except those on the industry of sports and exercise-based apparel, consumer electronics, prepared foods, shoes and accessories, and green foods. But despite of this good forecast for apparel-based industries, apparel expenditures among the U.S. customers will still somewhat decrease. Footwears also are expected to outperform for the coming years but like the apparels, they also declined. Companies are expected to offer more value priced clothing and products to entice thrifty consumers to purchase. Adidas AG continued to suffer from declined in revenues and profits as reported in the 3rd quarter of 2009. Adidas Group needs a clear three year strategic plan to compete effectively against its competitors. Armani announced that it will be joining forces with Reeboks innovation and technologies to result in the ultimate activewear concept.

III. Areas of Consideration


1. Competitors Competition is very rampant in sports clothing, sports equipment and footwear market. With the onset increase in the number of competitors that Adidas AG has, its struggle for the number one spot is undeniable. Adidas AG should be knowledgeable enough with regards to the new products, strategies and promotions that its competitors have. Some of the tight competitors that Adidas AG has are Nike, Under Armour, Callaway Golf and the fast emerging Li Ning. With every decision that it makes, it should consider well if that decision can help the company beat its competitors not only on the short term basis but most importantly in gaining long term benefits. If Adidas AG is to acquire the Armani Group then it can diversify and expand its existing product line by incorporating a touch of luxury with durability and style. 2. Global Economy Most of the corporation today is facing challenges in the issue of the state of the global economy. This includes currency rates, change in the buying pattern of the customers that is caused by their more stringent budgeting of their hard earned money, unemployment rates, provisions on taxes and other economic issues. This issue can be viewed as unfavorable in some ways with the proposed acquisition of Adidas AG of the Armani Group. The Armani Group being distinguished as the leading fashion and luxury goods group in the world can even set the price of Adidas AG products higher which can eventually decrease its marketability with the middle class and isolating it to the upper class. 3. Shift in Customers Buying Pattern and Behavior Since the cost of living in almost all of the places in the world increased significantly, customers put considerable amount in their spending. They want to make sure that they can get more than what they pay for. They are more stringent in terms of spending their hard earned money. In terms of buying commodities, they make sure that the price, durability and functionality of their chosen product is well considered. Customers are now wiser in terms of choosing the products that are within their standards. 4. Financial Condition of the Acquirer and Acquiree Adidas AG must consider its financial condition in making its decision whether to acquire Armani Group or not. A look at its financial position shows that it has extensive long terms debts and high goodwill. This can make the company in trouble in the years to come. Its financial position also shows that its accounts payable increased

significantly from 2007-2009, this means that a substantial portion of its assets must be set aside to pay these currently maturing obligations. In effect, the acquisition of Armani Group may in some ways affect the financial resources that Adidas AG has. Although the terms of the acquisition are not stated, it still will have a great impact on the financial condition of Adidas AG not only in the short run but also in the years to come. Knowing the financial condition of the acquirer is not enough in ensuring a sound decision. The company should also consider the financial health and capability of the company it would wish to acquire. It should make sure that the acquisition would not result in an unprofitable venture and wastage in the time, effort and resources of the company. Since Armani Group is the leading fashion and luxury goods group in the world, then even without looking at its financial statements would lead to the belief that it is profitable and is in good financial condition and is operating efficiently and effectively. Its number of employees amounting to 5000 individuals and its 13 factories worldwide would indicate its good financial condition. But these will not relieve the Adidas AG from having an in depth evaluation before making an investment decision of acquiring The Armani Group. 5. Line of Business and Congruence in Organizational Structure, Environment and Policies For any teams or groups to operate in synergy, its vision and mission, policies, corporate environment and structure should be in lined with each other. In effect, a company should only acquire business enterprises with same or related vision and mission. The company should also consider the target market and the line of business that the company they wish to acquire has. The line of business of the acquirer and acquiree should not be contradicting so that they can develop their product in such a way that it facilitates the improvement and development of a product so that it may possess the best of the companies. Same target market is also important because it dictates how price, product specifications, marketing techniques and overall strategy in increasing the salability of the product should be. The company should also reconcile its corporate environment, policies and structure with the acquired company; it should correct or consider the difference in the corporate structure and policies between itself and the acquired company. With those considerations, the company can establish a unified and firm organization. 6. Comparing Projected Cash Flows with the Cost of Acquisition The company should obtain reliable projected cash flows of Armani Group to compare with the cost of acquiring the company. It will analyze if benefit will exceed the costs, which is mainly the purpose of the acquisition to improve the financial performance of Adidas AG and to be a threat competitor to rival firms in the industry.

7. Forecast of the Products that will Outperform and the Products that will be Left Behind According to S& P Industry Surveys, most of the retail industry will continue to suffer reduced sales over the coming years, but a few will outperform the otherwise lackluster forecast. Sports and exercise- based apparel, consumer electronics, prepared foods, shoes and accessories and green goods are said to be the products that will outperform. Although there is a good forecast related with apparel based items, their revenue had still dropped in the first quarters of 2008 and 2009. With regards to the forecast that sports based apparel will outperform, Adidas AG should focus on developing its sports based apparel and create new products that will capture almost all markets.

IV. Getting Into Areas of Consideration


There are several areas to take into consideration if it would be wise for Adidas AG to acquire The Armani Group. This is part of its strategic plan to compete effectively to its rival firms in the industry. The following are some ways to dig into details regarding the areas needed to be considered: 1. Analyze the segments that are generating more revenues and those that are not profitable. The company should analyze the profitability of each division, so that they can have a clear picture of the profitable and not so profitable divisions. In that way they can adjust their strategies and management styles to fit the needs of their company. Also if the analysis shows that one segment is incurring losses then it should consider dropping that segment if it will benefit the company in general. Despite the difficulty of determining the divisions profitability, the efforts will be fairly rewarded. Through the use of obtained outputs, the companys resources can be maximized by focusing on the divisions that will produce greater benefits to the company. The company can focus its time and resources in the division that can give a greater return to the company and can prevent waste of effort, energy and resources in trying to improve an unpromising division. 2. Respond to the trends and forecast. Responding to the trends and forecast means that the company should consider developing their product lines that will fit the demands of the consumers. They should produce more of the items that will be in demand and produce lesser of the products that are lackluster. In such ways the company can prevent shortage as well as surplus.

Also, the company will be able to get the attention of the customers because of new and improved products that they will launch. Increase in sales will result since they can cater to the changing needs of the customers. 3. Do a benchmarking of the best practices and marketing style in the industry. No matter how talented and skilled the management is, there is always something that has to be improved. With the help of benchmarking, the company can learn about its own strong points and weaknesses. It can adapt to the industrys most effective strategies and get rid of the things that hinder the companys growth. As a result, the company will be able to catch up with the competition in the market because it will become aware of what other companies in the industry are doing, and the strategies of the company will be closer to the standards or the industry norms. 4. Make a forecast of the financial position and performance of the company if it is to acquire The Armani Group. The company must have identifiable and concrete goals in its acquisition of the said company. It must have a clear plan before, during and after the acquisition and must have a strong control to make sure that the companys activities are directed towards the correct path. Consequently, the company will be able to assess if the Armani Group will be a worth the investment.

IV. Alternative Courses of Action


1. ADIDAS AG SHOULD PURSUE THE ACQUISITION OF THE ARMANI GROUP. Advantages a) Expansion - Adidas will have a wider range of products. With new types of items being made available to the customers, the company will then have increased sales. b) (beb di ko alam anu yung term) After acquisition, Adidas will have more assets because of the purchase or investment that took place. With this, the value of Adidas will also rise. c) Excellent marketing strategy d) Increase average shoe price e) Encourage a strong brand push f) Draw attention toward new style, sport and technological developments g) More products for different customers h) Increase in product line i) Reduction in costs j) Decreased competition k) Enter to new market/Segments

Disadvantages a) Risky The acquisition will be very uncertain. There is no assurance that Adidas will have a return on its investment and be earning more profit. There is a possibility that it will just incur losses. b) Costly Adidas would need to invest so it will be using a lot of its assets to pay for the acquisition. Because of this, its own operations might be affected because of the sudden decrease in assets. c) Change in Organizational Structure When a certain company acquires another company, chaos might arise because some employees would be confused of to whom they will report. After the acquisition, the organizational structure of both companies might be a problem. d) Incompatible Company Policies Since the two companies cater to different markets, the policies they have set for their own might not be related or aligned. It can create conflict because the management will not be able to identify which particular policy from the two companies must be followed. e) Items may not be saleable Since Armani Group offers luxury items and Adidas offers items almost for everyone, Adidas might not be able to sell such expensive items. f) Upper priced markets are more covered.

2. ADIDAS AG SHOULD NOT PURSUE THE ACQUISITION OF THE ARMANI GROUP. Advantages a) Focus on its own products Adidas will just focus its attention on its existing products and just improve them to catch up with changes in trend and it can also develop new products. b) Departure from high-risk acquisition Due to recession experienced by the global economy, acquiring The Armani Group will be risky for the company. The company is not in good financial position to enter into high-risk investments since its performance trend is declining. It would therefore be safe for Adidas to continue its own business with its own line of products. c) Conflict of interest will be avoided The managers of Adidas will just focus on enhancing the performance of their own company. Disadvantages

a) Stagnant The company will not be able to expand in terms of acquiring other companies. Its growth will be stagnant. It will just offer the same set of products and the customers might get bored with certain product lines. b) No other ways to earn If its own operations from Adidas will result to losses, the company wont be able to earn a profit because it has no other source of income.

V. Recommendation
The group strongly suggests the implementation of the first alternative course of action. It is highly recommended that Adidas AG should not pursue the acquisition of The Armani Group. Since any corporation faces the state of global economy, it is not advisable for any corporation to enter into high-risk investments. Based on the reported statements, the company has experienced a declining financial performance trend, thus, acquiring a company in time of global recession may just contribute to losses incurred by the company. Although the alliance may create a special collection combining active style with sport and technology, still, anticipation of customers buying patterns is hardly identif iable. Moreover, according to surveys, most of the retail industry will continue to suffer reduced sales over the coming years. This simply exemplifies that the prospect alliance with an ultimate activewear concept that is expected to trend may fail, considering the present state of global economy and validity of the forecasted results. Instead of expanding the business through alliance with The Armani Group, Adidas AG may just improve its own line of products to compete with the rival firms of the industry. It may create new trendy products that will give satisfaction to customers preference. It may also increase its marketing strategy to gain customer loyalty, which is a sustainable competitive advantage for the company. Aside from that, there will be no changes on the organizational environment and culture. In which, such changes may result to conflicts among employees and managers that will massively effect the workplace as well as the operations.