Acquisition of Reebok by Adidas, M&a Deal in the Sports Industry

This report presents a brief summary of the M&A deal and the performance of the Adidas-Salmon Group and the Reebok International which are the top players after Nike, in sportswear market. Mergers and Acquisitions is an extreme matter of concern in the corporate world since last few decades. M&A can also be considered as a main vehicle which drives towards direct investments, either domestic or foreign. With motives of achieving greater efficiency and effective strategies, most of the companies had gone through at least one M&A activity at least once in a lifetime.This report contains theories regarding Mergers and Acquisition and is focused on the Cross-border M&A (Adidas- A German company and Reebok- an American company). It includes the acquisition process and presents the motives behind the acquisition of Reebok by Adidas. The report also includes the analysis to identify whether synergy (Value of (Adidas+ Reebok) > Value of Adidas+ Value of Reebok) has been achieved or not. I t can be identified through performance measurement and evaluation.The analysis of the company’s annual reports and the reviews in various websites contributed to determine whether the company is able to achieve its target objectives. Table of Contents S. N. Title Page No. 1. Introduction1 2. Literature Review2 a. The need of Merger2 b. Due diligence3 2. 2. 1 Legal and regulatory issues3 2. 2. 2 Tender offer3 2. 2. 3 Empirical Evidence4 2. 2. 4 Strategies of Adidas & Reebok 4 3. Methodology5 4. Discussion5 a. Synergies achieved5 4. 2 Financial Analysis6 4. 3 Targets and Achievements: Post merger evaluation7 . Conclusion and Recommendations9 References10 1. Introduction Corporate Restructuring is the process of reconstructing the operational, financial, legal and other structures of an organization in order to achieve the organizational efficiency, technological advancement, market expansion, profit maximization and obtain the competitive advantage over others. Mergers and Acq uisitions (M&A), which is one of the major corporate restructuring methods and started in US, has become a global practice for over 100 years.With the increase in globalization concept, most of the companies around the world have undergone through one among the following three types of M&A. Vertical merger which includes the combination of the forms operating in the different levels of the same industry differs from the Horizontal merger where the two combined firms operate in the same business activity. Conglomerate, the third type is rather unique as it involves the combination of firms of different industry. For a detailed analysis of M&A activity, I have chosen an acquisition ofReebok (an American sportswear company) by Adidas (a German sportswear company) and evaluating its performance and the various stages of the M&A activity. Adidas-Reebok acquisition is categorized under horizontal Cross-Border M&A whose main objective is to present the group as a market leader in the field of sportswear. The rate of M&A activities seem to be increasing day by day. However, the success rate of these mergers is very low. This is because of the lack of ability to achieve the synergy, which is obtained as a result of increased competitive advantage.So, the report is based on evaluating the various aspects of Adidas-Reebok performance to draw the conclusion whether the integration is successful to meet the target objectives or not. 2. Literature Review With an aim to drive competition and growth in the sports market, there was significant presence of the M&A activities since late 1990s. In 1997, Adidas acquired the Salomon Group for $1. 4 billion. In 2003, Nike acquired Converse for $305 million and in 2004 Reebok acquired The Hockey Company for $330 million. In 2005, the Adidas-Salmon Group acquired Reebok for $3. billion and in 2008; Nike acquired Umbro Plc for 285 million.Many analysts have identified that the companies major objectives and targets of M&A activities ha ve not successfully achieved in most of the cases. Timothy and Mark (2007) point out the major of failure as cultural aspects of mergers that are poorly dealt with and mention that successful mergers are based as much on emotional reactions and energized behavior. Bjorkman, Stahl, and Vaara (2007) also discussed the role of cultural differences on the capability transfer for cross-border acquisitions. . 1 The need of Merger According to the data obtained by Sporting Goods Manufacturers Association International in 2004, Nike was the leader in American sportswear with market share of 36% leaving Reebok and Adidas the second and third position with 12. 2% and 8. 9% respectively. And America alone counts for almost 50% of the total global sportswear market. So, it was an important opportunity for Adidas and Reebok to have a combined competitive strength over the leader Nike, a famous brand in its fashion, status, colours and combinations.Besides that, Adidas was facing a tough competit ion with the fourth largest sports brand Puma, which compelled it to take the growth strategy through acquisition with Reebok. Puma had already disclosed expansion plans through acquisitions and entry into new sportswear categories So, 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. Also, the core competencies of the combined companies seem a major strength than the individual competencies. Adidas Core Competencies |Reebok Core Competencies |Combined Core Competencies | |–Technology |– Trend Identification |– Adidas technology with Reebok design | |– Customer focus |– Ability to market to a niche segment |– Adidas sports with Reebok women’s market | |– Brand recognition |– Women’s shoe design |– Adidas shoes with Reebok apparel | |– Supply chain |– Design expertise |– Ad idas global strength & Reebok US strength | |– Collaboratively competitive |– Celebrity relationships | | 2. Due diligence 2. 2. 1 Legal and regulatory issues: Any M&A process should face through the regulatory bodies before they are granted the permission. There are various antitrust authorities which will examine and restrict the merger activities that create the monopoly in a particular market. Some of these authorities are the Federal Trade Commission (FTC) in USA, the Competition Commission in the UK, the European Commission in EU and the Federal Cartel Office in Germany. Adidas, being the German company had successfully passed the regulatory check and was approved by both the Federal Cartel Office and the European Commission to acquire Reebok on $3. 8 bn.As Reebok was targeting mainly in the American youths where as Adidas was targeting the European professionals and these brands had different pricing positions, EU concluded that this integration would not signif icantly affect the competition in the sports market. 2. 2. 2 Tender offer Tender offer in M&A is a general offer made by any acquirer company to a target company either publicly or directly to the shareholders to grant their stocks in the price which is higher than the present market price. After analyzing the market value of Reebok, Adidas has offered the buying of Reebok’s share with 34. 2 percent share premium. A written consent between Adidas and Reebok was established mentioning all the legal obligations. 2. 2. 3 Empirical Evidence The once in a lifetime opportunity’, as mentioned by Adidas-Salomon AG Chairman and CEO Herbert Hainer, came into reality after the deal was closed on Jan 31, 2006, which provided the new Adidas group with an increased Capital of around â‚ ¬9. 5 billion ($11. 8 billion) in the global athletic footwear, apparel and hardware markets. Adidas-Salmon group paid $ 3. 527 bn to Reebok as total value of the Reebok shares calculated at the ra te of $59. 0 per share. They had paid 34. 2 % share premium. The share price of Reebok had rose by 30% after the acquisition.Hainer added, â€Å"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. This is considered as the major strategy to keep the existing brand values and customers safe, protecting their brand loyalty. 2. 2. 4 Strategies of Adidas & Reebok The two companies came to the M&A deal with some of the very important strategies that lead to the growth and expansion of the market and the product portfolio along with the shared technology. The acquisition helped the new group to double the sales in America (U. S. $3. 9 billion) and also Reebok to increase its sales in Europe from the Adidas’s strong brand recognition and market expertise. Both the groups are creating the greater job opportunities with the well expe rienced and world class employees. They are selecting their top most employees into a new group for more effective business operation.This will help them to establish themselves as top most global brand from their strength (improved R&D systems with award winning cutting-edge technology, trend-setting street wear and classic design) with a strong presence as qualitative and wide ranged sports products. The combined group showed stronger presence among various teams and athletes such as David Beckham, Allen Iverson, Yao Ming, Tracy McGrady and also the top sports events like FIFA World Cup 2006 and Olympics 2008 to increase the global visibility of both the brands. 3. Methodology The report is based on academic knowledge gained during the course and the further research done on various websites.This includes the company’s website, various reviews and other academic sources available in the internet. After introducing about the M&A process, the literature review was done from t he past papers about Cross-border M&A and the management report on Adidas-Reebok M&A. The official website of Adidas group was used as the major source of annual financial report and performance measurement report, which helped to analyze the success of the integration in terms of sales revenue and other performance measurement indicators. After the detailed study of the case, the report contains few recommendations which might help the company to increase its profit and ultimately achieve its target objectives. 4. DiscussionThe success and failure of the M&A can be accessed from the perspectives of shareholders, managers and employees as the interests of these groups do not coincide (Sudarsanam, 2003). The report below contains analysis from different perspectives. 4. 1 Synergies achieved: The combined group had achieved the synergies based on each other’s competitive strength. Operating synergies affect the operations of the combined firm and include economies of scale, inc reased pricing power, and higher growth potential (Damodaran, 2006). As a geographical and demographical category, Reebok got chance to benefit from its partner Adidas which has expertise in European market.Similarly, Adidas benefited from Reebok expertise in American and Asian markets especially the youths and women. The new group had the wide range of products with continuous brand development by sharing R&D technologies. The synergy in distribution channel can be obtained through distribution and operation efficiencies. They have obtained 40% synergies in marketing, sales and distribution through selective diversification of channels and the optimum utilization of distribution capacity. Hadfield (2006), in his article quotes the statement of Steve Bonomo, the head of recruitment of Adidas, who says that the Adidas-Reebok acquisition has reduced the global recruitment cost by 30-50 percent.This reduction in expenses will help to increase the profit to some extent. Through global s ourcing and using economies of scale, they have been able to achieve 20% operations synergies. 4. 2 Financial Analysis: After the integration the management structure was reformed with the reduction of unnecessary branches and departments. They also agreed to share the cost incurred in production technology, distribution and back operations. The Reebok switching from pre-order in bulk amount to pay as you go system results the instant cash and uniform production and distribution of goods. The Annual financial report of Adidas group shows the sharp increase of sales revenue after the acquisition process.As the official deal was signed in Jan 2006, there is the dramatic rise in the sales from Dec 2005 to Dec 2006 resulting very high sales revenue of the combined group than it used to get during the individual sells. There is a continuous increase in sales even though the market was hit by the economic crisis during past few years (shown in the graph). The fact that the Adidas group fa ced serious decrease in sales of Reebok goods in Europe because the company decided to shut down some of the retail branches was very noticeable. But there was huge increase of the sales of Adidas products in America, which ultimately offset the losses, incurred in the group and ultimately led the company towards profit. [pic] Source: Adidas-group. com/ annual report 4.3 Targets and Achievements: Post merger evaluation Targets |Achievement | Description | |Environmental |75% |The environmental targets and strategy for climate change and carbon emissions | |sustainability-Group achievement| |have been developed as a whole but the group-wide strategy covering the entire | | | |value chain has remained. | |Environmental sustainability- |50% |The cross- brand group was formed to support all the Adidas brands but the full | |Product | |implementation of the prepared guidelines is in due. |Environmental |100% |Launched the internal Company Initiatives to promote environmental assessments | |Sustainability-Properties | |and awareness, reviewed the in-house ‘Think Green Guide’, established the | | | |environmental management systems but still remained to get ISO 14001 | | | |certification by the end of 2010. | |Supply Chain Systems |75% |As a member of Fair Factories Clearinghouse Compliance, Adidas group fully | | | |review the integrity of the data. Also, launched new Environmental guidelines to| | | |provide health and safety guidelines to the employees.But remained due about | | | |50% of the task to implement upgraded Key Performance Indicator to measure the | | | |company’s performance and also the sustainable compliance monitoring | | | |methodology. | |Global Economic Crisis |100% |Provided several updates on company’s website about risk and supply chain | | | |consolidation. Also provided guidelines on managing employees’ redundancies and | | | |layoffs in appropriate manner. |Stakeholder Engagements- |50% |Highly accepted th e concept of marketing and sourcing strategy but couldn’t | |Internal | |obtain better cotton materials for quality and performance testing. | |Stakeholder Engagements- |100% |Broad engagement with the governments and key stakeholders which assist in | |External | |decision making and also collaboration with different brands, suppliers and | | | |other industry actors. | Source: – Adidas. com, annual report, 2009 5. Conclusion and Recommendations The M&A itself is a complex and risky process both in terms of making a deal and in achieving the target objectives. It is also difficult to identify the exact determinants of the success or failure of the M&A.So, the conclusions are met on the basis of the grounds that a researcher considers, but this might be insufficient to other researchers who consider the broader areas. The analysis carried out under the case of Reebok acquisition by Adidas group shows that the new group is able to increase its sells through the restruct uring process. But even performance measurement report of the company highlights some of the issues where the company was unable to achieve the target objectives. The major target to lead the market ruler, Nike has not yet been achieved. The market positions of these two brands have remained constant. In contrast, it has a biggest threat of its following competitor, Puma to have integration with Nike and drop down the market share of Adidas group.