Introduction
On August 03, 2005, Adidas-Salomon AG (Adidas), Germany’s largest sporting goods maker announced acquisition of the US-based Reebok International Limited (Reebok) for $3.8 billion. The share prices of both the companies recorded an increase on the day of the announcement of the deal. The share price of Adidas increased by 7.4% from €147.52 on August 02, 2005 to €158.45 on August 03, 2005 on the Frankfurt stock exchange, while Reebok’s share price at the New York Stock Exchange rose to $57.14 on August 03, 2005, an increase of 30% over the August 02, 2005 share price of $43.95. The deal would result in the union of two cutthroat competitors through a “friendly takeover”. Adidas and Reebok claimed that the merger was decided upon because of the realization that their individual (company) goals would be best accomplished by joining instead of competing. Nike International Inc. (Nike) was the common competitor for both Reebok and Adidas. Analysts said that the merging companies were alike in many ways. Both the companies had a reputation of using cutting-edge technologies to produce innovative products and both had eminent brand ambassadors from the sports and entertainment worlds.
3.0Evaluate the pros and cons of merger.
Mergers and acquisition commonly are two ways to pursue strategies. When two companies come into a mutual conclusion, mergers and acquisition can derive both advantages and disadvantages for the company. In Adidas and Reebok mergers, it can be seen that both companies facing pros and cons. 3.1Advantages of merger.
3.1.1Emerging markets.
The market analysts were doubtful about the merger being a strategy to withstand the competition from the nearest rival, Nike. Nike is the world’s largest sports goods, apparel and equipment maker. Nike had strong market share in the United States and the European Union. With the merger, Adidas with the support of Reebok can outstand in the performance and can reach the rival Nike in the regions of the United States and the European nations. Reebok which has very little presence in the Asian continent will gain power with the help of Adidas. The merger will lead to the capture of the
businesses in the emerging markets. Furthermore, in the past, Adidas has not been able to expand because it had problems shipping goods to the United States. It takes them about 14 days to ship from their factories in the Far East while Reebok can ship overnight. After the mergers, 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. 3.1.2Sustainable 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.
Adidas will benefit from increased distribution in North America, where Reebok already has a significant presence. Increasing 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. 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. 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. 3.1.3Overlapping operations.
The merger led to the overlapping operations in the areas of athletic goods
like sportswear, apparel, sports goods etc. Thus both the companies can manufacture the goods and apparel with minimal fixed and variable costs. Also, the time for the manufacturing of the goods will be decreased drastically with the combination of the streamlined operations. Each company is proficient in the manufacturing techniques and hence it would be helpful for both the companies with different brands to produce wide variety of sports goods, equipment and apparel. Patents will be shared among the companies so that the upper and middle level products can be manufactured with the same patents. 3.1.4Technology sharing.
Both the companies are proficient in their own ways of manufacturing. Both the companies can exchange the technological expertise in the optimization of the manufacturing processes, operations, human resources management and financial transaction management. Adidas is good at the manufacturing of the sports apparel where as Reebok is proficient in the sports equipment making. Both can share the expertise in the designing process for the betterment of the operational processes. 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. 3.1.5Cross cutting strategies.
The merger had brought many cost cutting strategies to both the companies. With the merger, the companies can share the common marketing strategies, manufacturing processes and financial operations. The employee exchange will be the most advantageous program of the merger through the companies can share the employee expertise and thus there will be lesser chance of hiring the new work force and reducing the costs. 3.1.6Improve both image.
Finally, the customers of both the companies can be retained and make them think that the united company will produce different products in terms of quality and diversity thus improving the brand image and thus the business of the Adidas group.
3.2Disadvantages of mergers.
3.2.1Wrong consumer perceptions.
Reebok is a discount sports goods brand where as Adidas is a premium brand. The customers will have a wrong perception in getting accustomed to the brands if and only if the management is able to establish and clear off the doubts of the customers. 3.2.2 Increase company borrowings.
With the merger, the borrowings of the united company will be high. The borrowings will affect the investors’ confidence and thus there will be less funding options to the company which will affect the company’s plans to the expansion. 3.2.3Poor performance after merger.
With the over dependence of the Reebok brand on Adidas will affect the sales of Reebok. Though Adidas previously purchased Salomon and TaylorMade, the performance of Salomon and TaylorMade is very poor in the year 2003. The overall revenues of both the companies for that year is around 21% where as the revenues generated by the Adidas brand is around 79%. Hence, care must be taken in order to promote the different brands of Adidas Group.
