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OVERVIEW:


Footwear is no longer viewed as a commodity that just offers protection for feet. What
was hitherto considered a 'Want' is today a basic 'Need'. Today, the footwear trade is a
vast and dynamic operation involving huge economies of scale. The low-cost countries
are gaining foothold in international markets leading developed countries to import and
outsource so as to meet their requirements. The athletic shoe segment is highly
competitive in nature with the major players such as Nike, Adidas, Reebok and New
Balance striving to retain their market share and the smaller players such as Puma
trying to gain market share. mportant features of this competitive segment are heavy
advertising, celebrity endorsements, brand awareness programs etc. Until the 1970s,
Adidas, the German sports company, was the market leader in the US due to its product
innovation. n the 1970s and 1980s, Nike & Reebok grabbed their share by redefining
the product offering and aggressive marketing. Adidas failed to retaliate. Their market
was undergoing several crises due to changes in leadership. n the 1990s, though
Adidas was revived by a turn-around specialist, it was not a challenge to Nike. Adidas
expected its takeover of Reebok to give increased clout with dealers' leverage of
endorsement deals and sponsorships and access to wider consumer base. The Adidas-
Reebok merger vaulted the combined entity into the second place in the American
athletics shoe market behind Nike. The takeover of Reebok doubled the German
group's North America sales. The Adidas Group's purchase of Reebok North America
showed an obvious attitude to ensuring that the Corporation's overall objectives will be
achieved. With the acquisition, a focus on increasing the band's apparel offerings and
sharpening the brand's image has been set. This will allow for an expansion of global
position and gaining a broader presence in key markets. To emphasize this fact, Adidas
has now replaced Reebok as the official apparel supplier to the American National
Basketball Association for the next 10 years. With the two company's combined
strengths, an aim to widen the organisation's overall profile and global dominance is
now more than ever possible.

Why merger????
1) Nike was the leader in U.S. and had made giant strides in Europe even surpassing
Adidas in the soccer shoe segment for the first time.
2) According to 2004 figures by the Sporting Goods Manufacturers Association
nternational, Nike had about 36%, Adidas 8.9% and Reebok 12.2% market share in
the athletic-footwear market in the U.S
3) Adidas was the No. 2 sporting goods manufacturer globally, but it struggled in the
U.S .Adidas was perceived to have good quality products that offered comfort whereas
Reebok was seen as as stylish and hip brand.

4) Nike had both and was a favourite brand because of its fashion status, colors, and
combinations.

5) Adidas focused on sport and Reebok on lifestyle. Clearly the chances of competing
against Nike were far better together than separately.
6) Besides Adidas was facing stiff competition from Puma, the No. 4 sporting-goods
brand. Puma had then recently disclosed expansion plans through acquisitions and
entry into new sportswear categories. For a successful merger, the challenge was to
integrate Adidas's German culture of control, engineering, and production and
Reebok's U.S. marketing- driven culture.














Introduction:

German sports products group Adidas-Salomon AG and the US Reebok nternational
Ltd.on 3 August,2005 announced that their Boards of Directors have unanimously
approved a definitive agreement under which adidas-Salomon AG would acquire all of
the outstanding shares of Reebok for U.S. $59.00 per share in cash. The offer price
represents a premium of 34.2% over the closing price of Reebok's stock on August 2,
2005. The transaction value is approximately C3.1 billion (U.S. $3.8 billion) including the
assumption of net cash of C69 million (U.S. $84 million).

The combination of adidas and Reebok accelerates the adidas Group's strategic intent
in the global athletic footwear, apparel and hardware markets. The new Group will
benefit from a more competitive platform worldwide, well-defined and complementary
brand identities, a wider range of products, and an even stronger presence across
teams, athletes, events and leagues. The new adidas Group has pro forma aggregate
2004 revenues of C8.9 billion (U.S. $11.1 billion).



The three leading sportswear companies in the world are Nike, Adidas and Reebok. n
August 2005, Nike was the leader in global market share with 32.9% compared to the
recently constituted Adidas-Reebok organisation that had 26.3% market share. n the
largest market in the world, the United States (US), Nike had 36.3% market share in
August 2005. Following the acquisition of Reebok in August 2005, the market share of
Adidas-Reebok in the US jumped to 21.1% from 8.9%.

%he 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 EBTDA . 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...



%he 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"...

COMPE%I%VE ADVAN%AGE:

Competitive advantage is a special edge that allows an organisation to deal with market
and environmental forces better than its competitors. Whereas, sustainable competitive
advantage is one that is difficult for competitors to imitate. This distinction is essential
when evaluating the acquisition and its effects.
A merger of this scale is inherently complex, dealing with issues such as global
positioning of companies, corporate cultures, and the allocation of resources. To better
understand the advantages gained from the Adidas-Reebok merger, we have examined
the following: Through these various analyses, we have discovered that the importance
of branding is paramount for success in this industry. Our research also identifies the
specific danger of competition between Adidas and Reebok.
Our analysis of the Adidas-Reebok merger shows how it will gain a sustainable
competitive advantage that may one day dominate the footwear industry both
domestically and internationally. The fact that Adidas and Reebok control such different
aspects of the shoe industry will help to ensure their success.
To fully understand how Adidas-Reebok will gain a sustainable competitive advantage
over Nike, the situation must be looked at from several different points. These include
industrial, customer and competitor analyses, as well as a look at the different
marketing strategies and changing marketing trends.





Adidas Core Competencies
Technology

Customer focus
Brand recognition
Supply chain
Collaboratively competitive

Reebok Core Competencies
Trend dentification
Ability to market to a niche segment
Women's shoe design
Design expertise
Celebrity relationships

Combining Core Competencies
O Combine
Adidas technology with Reebok design
Adidas sports with Reebok women's market
Adidas shoes with Reebok apparel
Adidas global strength & Reebok US strength

SustainabIe competitive advantage

The athletic apparel and footwear industry emphasises branding more than any other
competitive advantage. Through the use of advertisements, endorsements, promotions,
and licensing agreements, the top companies in this industry have devoted much of
their resources to brand recognition and loyalty. Adidas' acquisition of Reebok will
develop increased opportunities to achieve competitive advantage through branding.
Furthermore, extended licensing agreements and contracts will allow the Adidas Group
to sustain this advantage.

Sustainable competitive advantage cannot be reached without the successful merging
of Adidas and Reebok. The key to this success is how well they identify themselves.
There is a very real danger of cannibalisation to occur between the two separate
brands, where one brand takes away the others consumer base. However, Adidas
Chairman and CEO Herbert Hainer made clear that "it is important that each of these
brands must retain their own identity."

Hainer points out that Reebok's focused strategy is on the engagement of youth through
sports, music, and technology. Reebok, he points out, is a lifestyle brand. On the other
hand, Adidas' focus is on superior technology and performance, coupled with a large
international presence. As Hainer points out, "Adidas has positioned part of its product
range in the lifestyle segment, but the company relies on the performance market.
Lifestyle success to an authentic company is a bonus."

Adidas will benefit from increased distribution in North America, where Reebok already
has a significant presence. The addition of Reebok will enhance not only its position
among the top US distributors like Foot Locker and Dick's, but will also give Adidas-
Reebok more power over promotions and in-store displays. ncreasing its presence is
the key to achieving sustainable competitive advantage, because the increased
presence further engrains the most important advantage in this industry, brand name.

The acceleration of both brands is brought about through increased operating cash
flows. Along with the increased operating capital, other synergies such as operating
savings are realised. Catching up to Nike's huge marketing budget is a challenge, but
the increased operating costs coupled with the synergies will help promote further brand
recognition through marketing.

Reebok has an extensive line of men and women's apparel. The new company can
combine Reebok's apparel with Adidas' new addition of fashion designer Stella
McCartney, who has created an apparel line that integrates both sport and style. This
innovative move shows that Adidas continues to look for new opportunities and markets
in order to gain a competitive advantage.
n the past, Adidas has not been able to expand because it had problems shipping
goods to the United States. t takes them about 14 days to ship from their factories in
the Far East while Reebok can ship overnight. n the future, Adidas will be able to take
advantage of Reebok's existing distribution infrastructure in the U.S., while Reebok will
be able to benefit from Adidas' existing distribution infrastructure in Europe.
The Reebok brand will also gain sustainable competitive advantage through increased
brand recognition. Globally, Reebok will benefit greatly from Adidas' distribution around
the world. Coupled with the cost savings and increased cash flow, Reebok's marketing
resources could increase.
Combined R&D is helping speed development of cutting edge technologies, an
important feature of the increasingly fast paced industry. Expedited research will
develop higher consumer demand for innovation across all brands, putting pressure on
Nike's R&D capabilities.

SWO% AnaIysis
Before Merger
Adidas-SaIomon SWO% AnaIysis
Adidas-Salomon was a leading player in the sports good manufacturing industry. The
company had posted a very steady growth in its sales revenues in recent years,
essentially as a result of its strong brand image. The company had market leading
products and strong brand names including Adidas, Salomon, TaylorMade and others
which were further strengthened by its strong commitment to product innovations.
Furthermore, on the supply-chain side the company's commitment to reduce lead time
for manufacturing footwear had enabled the company to avoid the warehousing of
products.
O $9reng98

1. eading pIayer in the sporting goods industry
The company was amongst the top players in the sporting goods industry due to its
strong brands, market-leading products and commitment to sports for meeting
consumer expectations. The global sportswear market (Euro 45 billion) was dominated
by Adidas-Salomon and Nike and, at a certain distance, Reebok, PUMA and New
Balance. Adidas-Salomon's brands include Adidas, Salomon, TaylorMade and others,
which had very strong brand name recognition in markets served. The company's
products served many markets and include footwear, hardware, apparel, snowboard,
golf-related and other products.
2. Steady increase in saIes revenues
Adidas-Salomon's revenues from sales have been steadily increasing as reflected in the
last five years' sales performance ending 2002. From E5.1 billion of sales in 1998 to
E6.5 billion in 2002, the performance has improved by a CAGR of 7%. Though sales
declined by 3.9% in 2003 over 2002, it was mainly due to currency translations. The
company has been able to achieve this steady growth in revenues due to its strong
brand image, continuous commitment to product innovation that is consumer focused.
Such a steady growth in the company's revenue performance helped in maintaining a
very good image for the company and improved investor confidence. Additionally, the
company reported an outstanding operational and financial performance in the first half
of fiscal 2004. This underlined the company's momentum, with quarter on quarter sales
improvements for all brands, and a record gross margin and earnings growth of almost
40%, marking the strongest first half year performance in the company's history.

3. SuccessfuI new product innovations

The company had consistently launched new products and this has enabled it to widen
its portfolio and also enhanced its competitive position. Each company brand targeted a
specific market and new products were introduced based on their requirements. This
has helped the company achieve a greater degree of success. During 2002-2003, the
company launched ClimaCool and a3 in its running shoes category, which were big
successes. The company sold over 500,000 pairs in a3 and over one million in
ClimaCool. Furthermore, in the basketball shoes division, the T-MAC and T-MAC were
the bestselling in the US market in 2002 which has led to the release of T-MAC 4 lace
less footwear for 2004. The company's continuous commitment towards new product
innovations not only improved revenues but also helped in strengthening its relationship
with its customers and attracts new customers. n May 2004 the company introduced
what the company described as the first ntelligent Shoe - called "1", the shoe provided
intelligent cushioning by automatically and continuously adjusting itself.

4. ead time improvements
The company had considerably improved the lead-time required for footwear
manufacturing through lean manufacturing principles. Earlier in 2000, the company
used to take 120 days for producing footwear; by 2003, this had been reduced to
around 60 days. Such a reduction was made possible as a result of the company's
efficient implementation of lean manufacturing principles which helped in removing non-
value-adding procedures and activities, improved labelling, special handling and other
such activities to reduce time taken. These process improvements have helped the
company in avoiding warehousing of its footwear products.

5. Marketing strength
The company had planned and implemented major advertising campaigns during 2004.
The company's immense size and strong position have afforded it the opportunity to
undertake global advertising campaigns with focus on TV, print media and outdoor
advertising as well as point of sale and PR activities. The campaign "ImpossibIe is
Nothing", included top athletes from different disciplines such as Muhammad Ali and
his daughter (brand image, boxing and lifestyle), Haile Gebrselassi (brand image,
running), David Beckham (brand image, football) and Tracy McGrady
(brand,basketball).

O eakne88e8
1. &nfocused Strategy
The strategy of Adidas-Salomon was lacking focus. This is because it has a very broad
product portfolio, including sport performance products for athletic sports, basketball,
golf, tennis, Nordic disciplines, cycling and fashion oriented products. Rival Puma has
demonstrated that focus can translate into a high profitability.
2. Over-dependence on Adidas brand segment
While the purchase of Salomon, the French maker of ski and golf gear, steered the
company into the equipment arena, the company generated 79% ($4.9 billion) of its
total revenues of E6.3 billion from the Adidas brand segment in 2003, while the other
two contributed to the balance. Despite a strong image for the TaylorMade and
Salomon brands, they generated only about 21% of the total revenues. The company's
over-dependence on the Adidas brand segment, which mainly serves the athletes'
requirements, makes the company's overall revenues susceptible to the market
conditions in this segment.
3. High IeveI of Iong-term borrowings
Though the company reduced its borrowings by E181 million against 2002, the level of
borrowings was still very high. At the fiscal year end 2003 the company's long-term
borrowings as a percentage of equity were very high at around 146%, which amounted
to E1, 574 million. Such high debt level affected investor confidence in the company and
makes low-cost funding of growth plans difficult. By half year fiscal 2004 strong cash
flow had enabled more progress in debt reduction has been (net borrowings at June 30,
2004 were E967 million, down 39% or E616 million versus E1, 583 billion in the prior
year) made but debt remained high.

4. Order canceIIations
2003 revenue growth was substantially below the company's first impression from year-
end 2002 order backlogs, which were up a strong 14%. As 2003 revenues growth was
only 5%, significant order cancellations in the course of the first half of 2003 are evident.
The company achieved revenues that totalled E6, 267 million ($7,570.4 million), a
decrease of 3.9% against the previous years revenues that totalled E6, 523 million.

O 55or9:ni9ie8

. Strategic acquisitions and agreements

The company made a few strategic acquisitions during 2004. n September Adidas and
Stella McCartney announced a long-term partnership in New York, presenting the
Adidas by Stella McCartney sport performance collection. For the first time ever a high-
end fashion designer had created a functional sport performance range for women. The
first collection was available in stores across the US, Japan and Europe in
spring/summer 2005. t offered products for running, gym/workout and swimming as
well as cover-ups. The Adidas by Stella McCartney range shows the company's
willingness to innovate in the women's sportswear market. Adidas-Salomon acquired
Valley Apparel Company of Cedar Rapids, owa in June 2004, a producer and
distributor of collegiate and professional league apparel and accessories. t served
small- to mid-size retailers, such as sporting goods stores, department stores, fan shops
and college bookstores. t has a reputation of producing and delivering large quantities
of apparel and branded accessories within hours of a team's victory. n early 2003, the
company acquired the Maxfli brand of accessories and other golf related products from
Dunlop Slazenger Group through its TaylorMade-Adidas division. This acquisition has
helped the company in offering market leading products in all the golf categories and
has improved its global market share to 16% from less than 1% prior to the acquisition.
The company also entered into a strategic agreement in June 2003 with the
NTERSPORT nternational Corporation (C), a multi-sport retailer, in order to
strengthen its sales and distribution network. Specifically, the four year agreement will -
in time - strengthen the company's sport performance, casual, Salomon and other
products' sales.
2. SuppIy-chain and manufacturing initiatives
The company's success in reducing footwear manufacturing time was likely to continue
in the future also. The company planned to reduce its production time further, which has
helped the company achieve faster delivery of its products to the retailers, thereby
reducing inventory costs. On the supply-chain side, the industry faces a problem due to
longer time to market. The total time taken is about 15 to 18 months of which 12 months
are spent in creation of the product, while the balance of the time in arranging for the
raw materials, production and delivery to the retail stores. The company also planned to
implement a new model for its supply chain, which will considerably reduce the time
taken and improve cost efficiency, etc. This initiative helped the company in serving its
customers faster, thereby gaining a competitive edge over its peers.
3. Sponsoring sporting events
The company's sponsorship of major sports events brought great recognition to its
products. Adidas supplied more than 1.4 million products to federations, volunteers,
officials and others during the 2004 Olympics. Following a successful marketing
campaign at the Euro 2004 Soccer Tournament in Portugal, the company once again

expected to achieve new record sales in football during 2004. During 2002, the
company sponsored FFA World Cup Championship in Korea and Japan and was
acclaimed as the most visible among the brands advertised during the event and was
viewed by 44 billion cumulative spectators during the course of the event. Furthermore,
in the Winter Olympics of 2002, the company sponsored over 50% of the participating
athletes who won about 200 medals. Adidas has a life-time agreement with Kevin
Garnett (most valuable player of the NBA 2003/2004). t also signed a six-year
cooperative agreement with Chinese Football in June 2003. The company sponsored
the World Cup in 2006 held in Germany. Sponsorship of these events helps the
company in building its Sport Heritage, Sport Style and other such divisions. For
instance, the Sport Heritage division grew into an Euro 900 million businesses and
doubled its sales from 2001 to 2003.
4. Own retaiI stores
n 2003 Adidas generated 9% of group revenues in own retail outlets. A significant
number of new shops did not positively contribute to earnings because the cost for new
shops (of hiring of sales people and training costs etc.) exceeded early revenues. This
will begin to level out going forward and the company will continue to open own retail
shops. Management recently explained that own retail sell-through was positive in the
US in 2003 in contrast to external customers. The company is therefore planning to
open 15 new US shops in the coming two years and 40 worldwide. Management
expects Sport Heritage to grow again from 2004 driven by more own retail stores and
no more cutting of external points of sales.
O %rea98

. Competition
Adidas operated within a highly competitive market which in many cases overlaps into
other markets as sportswear retailers increasingly compete with fashion retailers. The
company's traditional competitors like Reebok, Nike and Puma made competitive levels
intense, but the addition of casual footwear and apparel manufacturers such as Tommy
Hilfiger, adding a designer edge to the market, had increased competitive levels.
Companies had come under increasing pressure recently from products designed for
the value conscious consumer. Adidas have long been one of the premium brands in
sportswear and have charged accordingly, though this strategy is coming under more
pressure as cheaper substitute products are bought by consumers adding to problems
in terms of customer retention.

2. Foreign exchange fIuctuations

The company's manufacturing activities were mostly concentrated in China and other
Southeast Asian countries. Since most of these countries transact in US Dollars, the
company incurred about 70% to 80% of its outsourcing expenditure in US Dollars,
whereas, the company's revenue generation in US dollar and other non-Euro currencies
is comparatively lower. Hence, adverse changes in the exchange rate between US
dollar and Euro had a negative impact on its overall revenues.
3. Weak gIobaI economy
The GDP of European countries have grown at a negligible rate and are unlikely to
improve in the near future. Similarly, the Latin American markets such as Argentina and
Brazil continue to witness weak economic conditions, while the Southeast and Middle-
East regions continue to reel from political unrest. Thus, the company's revenues were
significantly affected due to these adverse economic conditions.
4. Impact of scandaIs in the &S and Germany
Accounting scandals across industries in Germany and the US have impacted upon the
company's stock performance. The weak performance of many companies in the sports
goods industry adversely affected the investor confidence in the industry. Thus, external
factors can have an adverse impact on the company's stock price performance and
might in turn affect its brand's value

Reebok SWO% AnaIysis (before the merger)

Reebok nternational was a major player in the sports and fitness products market, with
a particular emphasis on footwear. ts main strengths lied in its size and strong brand
awareness. While footwear is clearly its core product, concerns were being raised over
its comparative disinterest in the associated athletic apparel market, which is over twice
the size of the footwear market.
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. Growing saIes revenue

As part of a strategy to grow quality market share, the company continued to invest in
three key product and marketing platforms: Performance, RBK and Classic. Reebok
nternational was the second largest manufacturer of athletic shoes in the US, behind
Nike. The Reebok brand continued to drive sales pushing it closer to major
competitors, Nike and Adidas. Reebok had become the number two or number three
brand in most of its overseas markets. t held around 10% of the global market,
compared to Nike's 34% and Adidas' 15%. The company has been able to increase
revenues and improve operating margins despite some challenging retail conditions in
many key markets around the world in 2004.

2. ExceIIent marketing strategy
The company employed a strategy of reinventing its brands in order to gain market
share. n order to enhance its Reebok brand, the company introduced a new street
inspired product collection, RBK, in 2002, followed by an effective marketing strategy
which carried into 2003 and 2004. During 2003/2004, the Reebok product offerings
generated healthy sell-through performance at retail. Alongside reinventing brands,
the company introduced new marketing campaigns to promote them. To support the
RBK product Reebok created a marketing campaign entitled Reebok's "Sounds and
Rhythm of Sport," which fuses music and entertainment with sports and performance.
The combination of relevant products and a new marketing campaign improved the
performance of the Reebok Brand in the athletic specialty channel of distribution.
Reebok has achieved positive market share comparisons in the critical athletic
specialty and sporting goods channels of distribution (as of October 2004).

3. CeIebrity associated sponsorships
The company expanded its product offerings into more lifestyle and performance
categories, introducing new product segments for both the NBA and NFL, including
NBA and NFL footwear, classic lifestyle apparel and performance gear for off-the-
field activities. Reebok sponsored many top athletes in tennis; Andy Roddick and
Venus Williams; as well as music stars Jay-Z, Pharrell Williams and 50 Cent. Yao
Zing's impact in the Asian market is hugely important to Reebok. Affiliating itself to
such globally renowned celebrities enhanced the company name among many
different customer groups.

4. Strong women's sector
Another one of Reebok's strengths was its success in the women's sector. The market
for women's athletic shoes is larger than that for men, accounting for around 46% and
40% of the sector's value respectively. n volume terms, the women's sector was even
more important, 46% compared to 35%. Reebok's market share of women's athletic
shoe sales was around 35%, and has been boosted by its 't's A Woman's World'
marketing campaign

O eakne88e8

. 'CIassics' under fire

The company had come under fire from its rivals in the classics department. n the past
Reebok has controlled this shoe category without much competition, however
companies such as Nike and Adidas were coming up with their own 'classic shoes'.
Reebok were still the market leaders in that area but the gap kept narrowing.
2. ow market share in appareIs
Reebok controlled only about 1.4% of the apparel market. This posed a problem when
squaring up with its fierce competitor, Nike. The footwear market's growth was slowing.
Athletic apparel gives scope for a larger and more diverse range of products, keeping
the market fast moving. The apparel market was 2.4 times larger than the footwear
market. Nike took charge there, with its innovative designs, and contracts with sports
teams and organisations throughout the world.
3. Danger of stockpiIing products by retaiIers
Futures, or ordered in advance sales, represented around 60-70% of Reebok's
business. This has been valuable to Reebok in the past; however five of the company's
brands that represent around 60% global market share could cause problems in the
future. Futures growth for these five brands was around 9.5% on a dollar-weighted
basis. This growth was alarmingly fast. Reebok had to be careful as retailers may be
ordering more than they can sell. This could result in a sudden cut off in orders, leaving
the company with large inventories and a decrease in sales.

O Opportunities

. Increase average shoe price
Reebok's average price per shoe in athletic footwear stores, which account for around
15% of the market, was considerably lower than average. ts average price per shoe is
$45, compared with an outlet average closer to $60. The company's lower than average
shoe price is partly due to the high percentage of basic products sold, which is itself
partly attributable to its traditional position in the women's sector. This left plenty of
space for the company to muscle in on higher priced sales, as its products and
promotional efforts improve. As well as raising brand awareness, Reebok's sponsorship
deals helped the company increase its average sales price.

2. Draw attention toward new technoIogicaI deveIopments
Reebok had started developing its product to make it more modern and has invested
heavily in added technology to enhance its shoes. Reebok had a lot to gain from a
continued investment in more technologically advanced, premium products. n 2003, the
company introduced new fashionable and technologically advanced products tied to
new integrated marketing programs. These displayed an enhanced and prominent
vector logo which ties back to the Professional athletes wearing the products on the
field. This branding created a real point-of-difference for its performance products and
should help to generate consumer interest at point-of-purchase. These products are
supported at retail with a new performance marketing campaign, which utilises the
athletes and the vector logo in new and creative ways. This campaign included
television, print and in-store marketing packages.

3. Encourage a strong brand push in Europe
The company planned to enhance its European market, recruiting new management
talent and initiating an aggressive program to regionalise this business utilising a
consistent brand image throughout Europe. Reebok executed unified product,
marketing, and sales strategies across all borders in Europe, thereby presenting the
Reebok Brand in a more relevant and consistent manner.

4. ExpIoit Nike's Iack of high profiIe sponsorship

Nike, the world's most successful sportswear brand and footwear producer struggled to
fill the void vacated by Michael Jordan. This was the first time in a long time that Nike
did not have an eminent sports star to spearhead their marketing drive. This has left an
opening for the likes of Reebok to exploit, particularly in the basketball arena. The
company took the Chinese sensation from Nike, Yao Ming, hoping to increase market
share by 10% to 30% by 2006.

O %hreats

. Over reIiance on footwear saIes
Footwear is Reebok's largest division and the company relies fairly heavily on the
footwear market. That was a competitive field experiencing much slower growth than in
previous years and, like most other producers, Reebok felt that it must do more to
increase sales. Reebok had also to be aware that the market for more expensive
footwear was slowing. This could ultimately force prices down, should this trend
continue for a significant period of time. With the company so reliant on footwear, it
risked losses, whereas other competitors such as Nike can fall back on their apparel
division.
2. Diverted from historicaI markets
Reebok's original success stemmed from the women's aerobics market in the 1980s. t
has since become apparent that the company has shied away from its roots. Reebok's
women's products represent only 25% of its athletic apparel volume. The women's
apparel sector actually accounts for around 40% of industry sales, which suggests that
Reebok risked losing out in the key market that transformed them into a global
company.
3. PotentiaIIy expensive new product marketing
Until recently Reebok had not focused on either the men's or the women's apparel
market for several years. Before it can build up sales significantly in this area, it had to
instil confidence back into consumers that it is good at producing more than just 'classic
shoes'. This process could've proven to be both time consuming and costly.

Af9er 9e merger
Adidas-Reebok SWO% AnaIysis
O Strengths
O More products for different customers
O ncrease in product line
O Acclivity in market share
O Now both upper and middle priced markets are covered.
O Shared R&D, Patents, technology & innovations

O Weaknesses
O Differing values among management
O Complexity of joining two corporate cultures
O Both companies belong to different countries

O Opportunities
O Reduction in costs
O Decreased competition
O Cross-over promotion by sponsored athletes
O Enter to new market/Segments

O %hreats
O Nike.
O Nike's possible acquisition of Puma.
O Danger of cannibalisation between the two separate brands.

Porter's Five Forces

arriers to Entry - ow
Adidas and Reebok combined are able to control their costs effectively, giving them an
advantage over emerging competitors in the industry. Their web sites are well- prepared
and updated promotions attract online shoppers. There are many exclusive product
differences in this industry that gives brand identity an immediate competitive
advantage. The Adidas and Reebok brand is well-known globally and plays a major role
in consumer decision making. Selling footwear is highly competitive; however, barriers
to enter into this industry are quite low. Therefore, the footwear industry is broad with
hundreds of retailers. Switching cost is low for the consumer, and may occur frequently
depending on consumer preference and other factors affecting consumer buying
decision.

argaining Power of uyers - High
There are a large number of buyers relative to the number of firms in this industry.
Therefore, companies like Adidas, and Reebok must continuously market their product
and differentiate their brands against competitors, in order to increase sales and market
share. The use of online tools has helped to enhance the accessibility among users.
Brand identity plays a critical role in the buying behaviour; strong identity will offer
consumers trust and loyalty.

argaining Power of SuppIiers - ow
There are many suppliers in this industry. n essence, there is very little differentiation
among the suppliers which makes suppliers' bargaining power non-existent. Leather,
rubber, and cotton are commodity items and are available abundantly in the market
place. Conglomerates such as Adidas, and Reebok have a definite advantage and
power over their suppliers. These suppliers become dependent on these firms as their
means to survival. Additionally, Adidas, and Reebok have standardised their input
procedures pertaining to the materials used, their labour force, supplies, services, and
logistics. Firms are able to switch between suppliers quickly and cheaply, due to the
globalise networks of cheap labour on various continents.

%hreats of Substitutes - ow
Buyers' propensity to substitute is low. Consumer substitutes for athletic footwear
products are low because there are little alternatives to switch, some substitutes for
athlete footwear could be boots, sandals, dress shoes or bear feet. Consumers are not
likely to substitute due to the performance specification of the product. For instance, a
basketball player would not wear boots to play basketball. Therefore, there are no real
substitutes for athletic footwear.

RivaIry among Existing Competitors - High
The rivalry among existing competitors in the footwear industry is quite high. Large firms
such as Nike, Adidas and Reebok have grown immensely over the last two decades.
Their global reach has expanded through all continents; this is evident using the nternet
and e-commerce. Online selling has enlarged the reach for these firms allowing them to
increase sales while minimising operating costs. Almost every large firm has a web site,
and most of these web sites contain virtual stores which provide convenience to
consumers. Most individuals in North America have access to high speed nternet and
online purchasing has become the new trend for the twenty first century.

Strategic enefits of the %ransaction

Adidas believes that the complementary nature of the two businesses in various
geographies, products and consumer segments provides a significant opportunity for
increased value creation. The combination will enable the Group to generate substantial
cost savings as well as incremental revenue and profits from more complete coverage
of all consumer segments. Given the solid management teams at both companies,
Adidas expects to realize the benefits of this transaction quickly and efficiently following
the transaction's close.

Extended geographic reach and more balanced sales profile. Reebok complements
adidas's international profile and enhances adidas's strong position in North America.
North America represents approximately 50% of the global sporting goods market, and
with Reebok, the adidas Group's North American sales will more than double to C3.1
billion (U.S. $3.9 billion). n Europe and Asia, adidas enjoys stronger brand recognition,
and has significant marketing expertise and insights. adidas expects to use this
expertise to further develop Reebok's global presence.

World-class and talented employees. Both adidas-Salomon and Reebok bring an
exceptional team of talented and experienced employees to the new group. As a result
of this transaction, Group employees will have even more exciting job opportunities.

Broader portfolio of world-renowned brands. The combined entity will have a more
complete portfolio of brands that caters to a global consumer base. The portfolio will be
anchored by two brands with well-defined identities adidas, a leader in sports
performance with a European heritage, and Reebok, an American leader in sports and
lifestyle products. With its broad portfolio of brands, including adidas, Reebok,
TaylorMade, Rockport, Greg Norman Collection, MAXFL, CCM, Jofa and Koho, the
adidas Group will be able to offer footwear, apparel and hardware products based on
cutting-edge technology, trend-setting street wear and classic design.

A more complete product offering in key sports categories. The new adidas Group will
have a stronger presence in American sports and a complete product offering that
addresses key sports categories, including soccer, basketball, running, American
football, hockey, tennis, training, outdoor and golf.

Stronger presence across teams, athletes, events and leagues. adidas expects that
the combined Group's strong presence across teams, athletes, events and leagues will
enable it to substantially increase the worldwide visibility of its brands. The Group's
endorsement contracts will include many of the world's elite teams, such as Real
Madrid, Milan AC, Bayern Munich and Liverpool FC, and athletes, such as David
Beckham, Tracy McGrady, Yao Ming and Allen verson, as well as high-profile global
events, such as the 2006 FFA World CupTM and the Beijing 2008 Olympics. The
Group will also have licensing relationships with the UEFA Champions LeagueTM, more
than twenty National Olympic Committees and five premier sporting leagues the

NFL,NBA, NHL, MLB and MLS.

Enhanced R&D capabilities and cutting-edge technology. adidas is an award winning
technology leader in the industry with the adidas innovation team having developed
cutting-edge technologies, such as adidas_1, the first "intelligent running shoe,
ClimaCool TM and a3. Reebok also has a very talented group of experienced
research and development professionals who have developed a distinguished portfolio
of breakthrough product innovations, including the Pump 2.0 and DMX. By harnessing
both companies' R&D expertise, the new adidas Group expects to accelerate new
product introductions in footwear, apparel and hardware to help drive increased brand
awareness and consumer demand across all brands
Major 2006 product launches:
Adidas: +F50 TUNT football boot, adidas_1 basketball shoe, Adilibria women's
apparel collection, integrated training system by adidas and Polar.
Reebok: Trinity KFS running shoe, Rbk 9k Pump Skate
TaylorMade-adidas Golf: r7 irons, TaylorMade TourPreferred (TP) golf balls

FinanciaI AnaIysis

Post Merger (Adidas)
Pre
Merger
Adidas

Particulars 2008 2007 2006 2005

Net saIes 10,799 10,299 10,084 6,636

Gross profit 5,256 4,882 4,495 3,197

Operating profit 1,070 949 881 707

Income before taxes 904 815 723 655

Net income 644 555 496 383
asic earnings per
share (in C) 3.25 2.71 2.37 8.19
Price / earnings ratio at
year-end 8.8% 19.9% 16.8% 5.11%

Return on equity 18.9% 18.2% 17.1% 14.27%
Return on capitaI
empIoyed 19.8% 20.2% 17.6% 15.2%
asic earnings
Operating cash fIow
Dividend
As it can be seen, pre-merger Adidas's return on equity and its return on capital
employed was less as compared to its post merger, which indicates that the capital was
not fully employed and utilized.
Basically, Return on equity measures a corporation's profitability by revealing how
much profit a company generates with the money shareholders have invested, and
since post merger Adidas return on equity is at growing stage, which thus indicates a
better scenario and synergy gain after merger in with Reebok and thus increasing its
profitability.
Whereas, Return on Capital employed ratio is more meaningful to the equity
shareholders who are interested to know profits earned by the company and those
profits which can be made available to pay dividends to them. nterpretation of the ratio
is similar to the interpretation of return on shareholder's investments and higher the ratio
better is. Therefore, again a synergy can be seen post merger, thus indicating a good
and beneficial merger for Adidas.

Also, as seen Basic earnings shows an increase of15.9% along with its dividend paid
which exhibits an increase of 29.2%
t also shows the increase in operating cash flow of 98.8% thus leading favorable and a
profitable deal.


Net income attributable to shareholders C in millions

Among which,2004 & 2005 represents Adidas Pre-Merger and 2006,2007,& 2008
represents Adidas post merger, thus showing a tremendous increase in its income
attributable to its shareholders, due to increase in its net income.

FinanciaI enefits

Accretive to earnings. adidas expects the transaction to be accretive to the Group's
earnings per share in the first full year after closing.

Return in excess of cost of capital. The transaction is expected to generate a return in
excess of cost of capital in the third full year after closing.

Strong operating cash flow. With aggregate 2004 pro forma cash flow of approximately
C671 million (U.S. $835 million), adidas expects the combined Group's financial strength
to enable it to reduce debt and continue funding the Group's established growth
initiatives.

Substantial operational synergies. adidas expects to achieve approximately C125

million (U.S. $150 million) of annual cost savings by the third year after closing. n
addition, the Group expects incremental revenue and profits from more complete
coverage of all consumer segments.




Post merger performance:
O Group sales reach C 10.1 billion; currency-neutral growth of 53% (14% excluding
Reebok)
O Currency-neutral sales increase 14% at adidas and 22% at TaylorMade-adidas
Golf; currency-neutral sales grow in all regions
O Gross margin: 44.6% (47.8% excl. Reebok)
O Operating margin: 8.7% (10.5% excl. Reebok)
O Operating working capital as a percentage of net sales reduced by 0.2pp to
25.8% (excluding Reebok reduced by 2.5pp to 23.5%)
O Capital expenditure: C 277 million (excluding extraordinary investments related to
Reebok)
O Net borrowings reduced to
C 2.231 billion; year-end financial leverage: 78.9%
O Highest ever net income attributable to shareholders at
C 483 million (+26%)
O Dividend increase of 29% proposed; adidas AG share price underperforms DAX-
30 and MSC World Textiles, Apparel and Luxury Goods ndex
O 7th March, 2007 -Adidas Group's motto is "mpossible s Nothing." But since the
No. 2 sporting-goods maker 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 Nike (NKE), the company has yet to prove that the combo will
work.
O True to its mantra, however, Adidas says it's racing flat-out to make its tie-up with
Reebok a winner. The company has closed factories in ndonesia and is
repositioning the Reebok brand to widen its appeal. "Our focus this year will be
on getting Reebok back onto a growth track," Adidas Chief Executive Herbert
Hainer said in a statement. "t's going to take time, but we're moving in the right
direction."
O As part of that move, the company is ramping up its sales and marketing efforts.
t's reducing reliance on low-traffic, shopping-mall-based outlets and placing
Reebok apparel and footwear in higher-end department stores and larger
sporting-goods ventures. Adidas has also enlisted star NFL quarterback and

Super Bowl MVP Peyton Manning, actress Scarlett Johansson, and other famous
faces to help launch a series of new products planned in the second quarter.
O The company says it 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
segments." For the group, the company expects sales in 2007 to grow in the
"mid-single-digit" range.


egaI Issues

When a major acquisition occurs, it is crucial to look at the legality of the proposal.
When asked about antitrust red flags, adidas' CEO Herbert Hainer replied, "We don't
see any areas where we would have a market-dominating position. And we don't
expect any big issues with regulators" (Boston Globe).
i
n the United States, the
Clayton Act prohibits any acquisition that would substantially weaken competition. After
computing the Herfindahl-Hirshman ndex formula, we found an HH of 1849.58
concerning the athletic footwear market, which is high enough to cause considerable
concern with the FTC.
ii
Although there has not been any mention of stopping the
acquisition, it is important to note that there is a possibility that it will be challenged.
(See Appendix A)

The Treaty of Rome is the standard for the European Union's competition policy. This
competition policy is in effect for all trade that crosses national boundaries within the
EU. Furthermore, individual nations are able to adopt their own competition policy laws
for trade that takes place within their own national boundaries.
iii
adidas' acquisition of
Reebok will be subject to the European Union's competition policy and will not be able
to take place if it does not abide by the law set forth. adidas trades outside of its national
boundaries, therefore it will have to abide by the EU competition policy. The EU bases
the legality of the merger on whether they abuse a dominant position in the market. A
merger that has been previously ruled by the EU as unlawful is the Microsoft case. The
European Union has not publicly stated if the proposed acquisition of Reebok is legal or
illegal. This is a good sign for adidas and Reebok as the deal should go through. Even
with a combined company, they still aren't going to hold a "dominate position" in the
athletic footwear market because of Nike's current position at number one.

Although the United States' laws and the European Union's laws are the main focus
when looking at the legality of this merger, it is important to remember that the
acquisition will be subject to the laws in all of the countries in which it does business.
For example, Reebok and adidas will hold a large athletic shoe market share in ndia
that may break antitrust laws. However, because so many of these competition-related
laws are subjective, it is hard to tell whether or not the acquisition will be found legal. A
large part of this subjectivity is the government's discretion on whether to refer to a
generalized market share (i.e. shoes) versus a specified market share (i.e. athletic
shoes).


CONC&SION
1)Analysis of the Adidas-Reebok merger shows how it will gain a sustainable
competitive advantage that may one day dominate the footwear industry both
domestically and internationally.
2)The fact that Adidas and Reebok control such different aspects of the
shoe industry will help to ensure their success.
3)Adidas will benefit from increased distribution in North America,
where Reebok already has a significant presence.
4)The addition of Reebok will enhance not only its position among the
top US distributors like Foot Locker and Dick's, but will also give
Adidas-Reebok more power over promotions and in-store displays.
5)ncreasing its presence is the key to achieving sustainable competitive
advantage, because the increased presence further engrains the most
important advantage in this industry, brand name.
6)Thus ,we can conclude that if the acquisition is well planned, executed and the
necessary precautions taken for the deal a company can achieve its strategic objectives
and thus ensure its growth & profitability through mergers & acquisition.

References

http://adidas-group.corporate-publications.com/2007/gb/en/consolidated-financial-
statements/consolidated-income-statement.html

http://www.icmrindia.org/casestudies/catalogue/Business%20Strategy/BSTR177.htm
http://www.casestudyinc.com/case-study-adidas-reebok-merger
http://www.nytimes.com/2005/08/04/business/media/04adco.html
http://www.bizjournals.com/portland/stories/2005/08/08/story8.html
http://www.finfacts.com/irelandbusinessnews/publish/article_10002786.shtml
http://www.businessweek.com/bwdaily/dnflash/aug2005/nf2005084_8340.htm
http://www.articlesbase.com/marketing-articles/adidasreebok-merger-1983240.html
http://www.docstoc.com/docs/17947394/With-adidas-and-Reebok-Combined_-Will-
Nike-Still-Crush-the
http://www.adidas-
group.com/en/investorrelations/reports/annually/2006/adidas_GB_2006/en/ziele-und-
ergebnisse.html
http://www.adidas-group.com/en/investorrelations/reports/annually/2004/en/f_fs_bs.html
http://adidas-group.corporate-publications.com/2007/gb/en/consolidated-financial-
statements/consolidated-income-statement.html

http://adidas-group.corporate-publications.com/2008/gb/en/adidas-gruppe-
kompakt/targets-vs.-results.html