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A Case Study of Reebok Acquisition by Adidas

In this report we will analyze a case study of Reebok acquisition by Adidas. And try to find out
merger aims (strategy) and reason and then will analyze the success of merger through analysis of
financial account. Finally it will conclude and see whether the merger is successful in achieving
its core objective or the merger create significant new value to the firm.
Adidas-Salomon AG on 3rd August, 2005 announced its plan to acquire Reebok at an estimated
value of () 3.1 billion ($ 3.78 billion). Adidas offer to pay 34.2 percent premium over last (i.e. 2
August, 2005) closing price for Reebok share. This makes the deal very favorable for Reebok, as
it was also facing a tough competition from its rival firm Adidas, Nike and Puma. And it seems
almost impossible to fight with their rival firms independently.
Adidas and Reebok are facing tough competition from their rival firm Nike. Nike had about 36
percent, Adidas 8.9 percent and Reebok 12.2 percent market share in the athletic footwear market
in North America. Although, Adidas holds the second position globally in sporting goods. The US
ranks the world's biggest athletic shoe market, account for 50 percent of $ 33 billion spend
globally. In order to compete with Nike, which has very strong market share in North America and
globally, Adidas announces the plan to acquire Reebok on 3rd August, 2005, and deal was finalized
on 31st January, 2006. As the deal seems to be very effective, on the date of acquisition
announcement, share price of Reebok goes up by 30 percent i.e., from $43.95 on august 2nd, 2005
to $ 57.14 on August 3rd, 2005 on New York stock exchange. And Adidas share price rose by 7.4
percent i.e. from 147.52 on august 2, 2005 to 158.45 on august 3, 2005, on the Frankfurt stock
exchange.
Reasons and aims of the merger
Strategic:
Adidas wanted to be at no 2. Nike led the US market as well as global market by giving a tough
competition to Adidas and Reebok, which were competing for the second and third positions. Nike
was the first choice of billions of people because Nike offers stylish look with quality and is famous
for its fashion status, color and combinations. While Adidas was supposed to be known for its
good quality and comfort and Reebok for its stylish look or 'hip hop' brand. Therefore it seems to
be impossible for two brands to compete with Nike independently. On the other hand Adidas was
facing a tough competition from Puma which was the number 4 sporting- goods brand. And
recently Puma had disclosed its expansion plan through acquisition and entry into new sportswear
categories this seems to have a definite effect on Adidas and Reebok market share. Therefore, in
order to compete with Nike and to achieve more strong position in the market, Adidas and Reebok
went for a friendly merger. This would help company in achieving more competitive position
worldwide
Broader portfolio of world-renowned brands:
Adidas and Reebok together will have a more complete portfolio of brands that fulfil the need of
a global customer base. The portfolio will be a combination of two brands with well-defined
identities Adidas, a leader in sports performance with a European inheritance, and Reebok,
American leader in sports and lifestyle products. With its broad portfolio of brands, including
Adidas, Reebok, Taylor Made, Rockport, Greg Norman Collection, MAXFLI, CCM, Jofa and
Koho, the adidas Group will be able to offer footwear, clothing and hardware products based on
cutting-edge technology, trend setting street wear and classic design.
A more complete product range in key sports categories:
The merger will help to have a stronger presence in American sports and a complete product
offering that addresses key sports categories, including running, tennis, hockey, soccer, basketball,
training, outdoor, American football and golf.
Stronger presence across teams, athletes, events and leagues:
Merger will provide Group with strong presence across teams, athletes, events and leagues. This
will improve the worldwide visibility of the brands. The Group's supporting contract includes
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 Iverson, as well
as high-profile global events, such as the 2006 FIFA World Cup and the Beijing 2008 Olympics.
The Group will also have licensing relationships with the UEFA Champions League, more than
twenty National Olympic Committees and five premier sporting leagues.
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 and Reebok has a very talented research and
development professionals who have developed a distinguished portfolio of breakthrough product
innovations, including the Pump 2.0 and DMX. With the help of both companies' R&D expertise,
the new Adidas Group expects to accelerate new product introductions in footwear, clothing and
hardware to improve brand awareness and consumer demand across all brands
Financial:
For Adidas this deal look very beneficial and targeting that it will recover more than its cost in just
three year time after the deal and Adidas expects to achieve about () 125 million
(U.S. $150 million) of annual cost savings in three year time, through Substantial operational
synergies. In addition, the Group expects increase in revenue and profits from more complete
coverage of all consumer segments.

Merger success
After the merger come acquisition Adidas group financial accounts show a significant
improvements. Groups 2006 half year result after the acquisition was fantastic, as a result of
acquisition and 2006 FIFA world cup. Adidas sales revenue increases by 17 percent in euro terms
i.e. () 3308 million in first half of 2006 as compare to () 3308 million in first half of 2005.
(2006). While the year 2006 complete annual report shows a fabulous result for the Adidas group.
Sales revenue increases by 52 percent i.e. from () 6.636 billion in 2005 to () 10.084 billion in
2006, representing the highest organic growth of the Adidas group within last eight years. It's the
first time in the group history when it cross the benchmark of () 10 billion. ( 2007). Adidas AG
chairman and CEO Herbert Hainer commented in a press release on an outstanding performance
of the group that, '2006 was a truly exciting year for the Adidas group, as we strengthened our
brand portfolio by acquiring Reebok and exceeded the () 10 billion sales mark for the first time
in group history'.( 2007)
In 2006 growth in sales revenue is carried on in 2007 and 2008 also where firm in 2007 report an
increase of 7 percent revenue in terms of currency neutral basis but negative currency movement
affect the groups sales in euro terms. It increase by 2 percent i.e. from () 10.084 billion in 2006
to () 10.299 billion in 2007 in euro terms.
In 2008 group record 9 percent growth in sales revenue in terms of currency neutral basis and 5
percent in euro terms, i.e. from () 10.299 billion in 2007 to () 10.799 billion in 2008. The result
was supported by strong sales growth in the Adidas and Taylor Made Adidas golf segment. (2009).
Financial aim of the merger to reduce the operating cost through substantial operational synergies
seems to be achieve as the firms has improved its gross and operating profit margin after the
merger.
Adidas group gross profit increased by 41 percent in 2006 as compare to 2005 i.e. from () 3.197
billion in 2005 to () 4.495 billion in 2006. And operating profit increase by 25 percent i.e. from
() 707 million in 2005 to () 881 million in 2006. In spite of increase in profit groups gross profit
margins declined by 3.6 percent to reach 44.6 percent of sales in 2006 as compare to 48.2 percent
in 2005 and operating profit margin declined by 1.9 percent i.e. from 10.7 percent in 2005 to 8.7
percent of sales in 2006. This declined was reported due to first time consolidation of the Reebok
business, which carries a significant lower operating margins than the group average. (2007).
In year 2007 and 2008 companies gross profit margin and operating profit margin has increased it
is due to cost saving resulting from the combination of Adidas and reebok sourcing activities as
well as underlying improvement in all segments also contributed to this development. As a result
gross profit margin increased by 2.8 percent in 2007 reaching 47.4 percent as compare to 44.6
percent in 2006. (2008), and in 2008 it increased by 1.3 percent i.e. from 47.4 percent in 2007 to
48.7 percent in 2008, this is the highest annual gross margin from the group since the IPO in 1995.
(2009). Group gross profit has also increase by 9 percent in 2007 and 8 percent in 2008 reaching
a level of () 4.882 billion in 2007 and () 5.256 billion in 2008. ( 2009). The groups operating
profit margin increased by 0.5 percent in 2007 reaching 9.2 percent as compare to 8.7 percent in
2006. (2008). and in 2008 by 0.7 percent i.e. from 9.2 percent in 2007 to 9.9 percent in 2008.
Groups operating profit has increased by 8 percent in 2007 i.e. from () 881 million in 2006 to ()
949 million in 2007 and by 13 percent in 2008 reaching a level of () 1.070 billion.
Merger's aim to expand in Asia market and to generate more revenue from Asia market seems to
be fulfil as the sales revenue from Asia market has improved constantly after the merger. It
increases by 33 percent in 2005 i.e. from () 1523 million to () 2020 million in 2006 (2007), by
12 percent in 2007 reaching to () 2254 million (2008), and 18 percent in 2008 reaching a level of
() 2662 million (2009). In 2005 sales from Asia contribute 22.95 percent of the group total
revenue which increased to 24.65 percent in 2008. Proving the success of merger mission to
expand in Asia market.
Company's main aim to compete with Nike in North America market seems to be unfulfilled, as
the revenue generated from North America has gone down. Although in 2006 group revenue from
north America has increased significantly from () 1561 million in 2005 to () 3234 million in
2006 i.e. 107 percent growth, but this can be due to 2006 FIFA world cup as group revenue from
north America has declined thereafter. In 2007 it decrease by 9 percent reaching () 2929 million
(2008), and in 2008 by 14 percent reaching () 2520 million (2009). In addition after acquisition
both Adidas and reebok have lost US market share of athletic shoes. Adidas hold 10.62 percent
market share in 2006 which goes down to 6.93 percent in 2007 and 5.86 percent in 2008. And
reebok hold 4.68 percent market share in 2006 which goes down to 4.43 percent in 2007 and 2.66
percent in 2008. On the contrary Nikes market share has increased from 29.73 percent in 2006 to
31.52 percent in 2007 and 34.61 percent in 2008.
Other shortfall of the acquisition can be seen from the declined sales revenue of reebok. Reebok
sales goes down by 9 percent in 2006 i.e. from () 2718 million in 2005 to () 2473 million in
2006 (2007), it decrease by 6 percent in 2007 reaching () 2333 million (2008) and declined by 8
percent in 2008 reaching a level of () 2148 million (2009). As compare to 2005 reebok sales has
decline by about 21 percent after the merger till 2008 showing a very poor performance by reebok
and groups inability to maintain reebok efficiently.
Conclusion
Adidas and reebok merge together to compete with Nike in North America and to increase their
sales revenue and reduce operating cost through synergy of operation and to expand into Asias
market. Merger main aim to compete with Nike in North America market was a failure as the loose
their market share after merger. But at same time merger was successful in its other aspect of
increasing sales, cost reduction and expansion into new market, creating a new value to the merger.