Merger and acquisition (M&A) brought two companies together to work and achieve common objective. This report will analyse a case study of Reebok acquisition by Adidas. And try to find out merger aims and reason and then will analyse extend to which merger achieved success, through the analysis of financial account. Finally it will conclude and see whether the merger is successful in achieving its core objective and if the merger created significant new value to the firm.
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Background of the acquisition:
Adidas-Salomon AG on 3rd August, 2005 announced its plan to acquire Reebok at an estimated value of â‚¬3.1 billion ($ 3.78 billion). Adidas offer to pay $59.00 per share in cash i.e. 34.2 percent premium over last (i.e. 2 August, 2005) closing price for Reebok share. (8)
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 (1).The US ranks the world’s biggest athletic shoe market, account for 50 percent of $ 33 billion spend globally (4). 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 finalise 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 2, 2005 to $ 57.14 on August 3, 2005 on New York stock exchange. And Adidas share price rose by 7.4 percent i.e. from â‚¬ 147.52 on august 2, 2005 to â‚¬ 158.45 on august 3, 2005, on the Frankfurt stock exchange.
Reasons and aims of the merger:-
Strategic aims of the merger:
Adidas wanted to compete with Nike in North American market. Nike leads 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 they offered stylish looks with quality and was famous for its fashion status, colour and combinations. While Adidas is known for its good quality and comfort goods and Reebok for its stylish look or ‘hip hop’ style (1). And therefore it seemed 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 in sporting- goods brand. And recently Puma had disclosed its expansion plan through acquisition and entry into new sportswear categories (1). This seemed to have a definite effect on Adidas and Reebok market share. Therefore, in order to compete with Nike and to achieve stronger position in the market, Adidas and Reebok went for a friendly merger. This would help company in achieving more competitive position worldwide.
Adidas wanted to extend their global reach. In Europe and Asia, Adidas hold a better marketing position and brand recognition and this could be used to expand Reebok market in Europe and Asia (8). On the other hand merger will help Adidas to capture Asian fashion oriented market where Reebok already had its presence through marketing tie ups in China with Yao Ming (3).
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. Well defined and complementary brand, i.e. Adidas which is European based company is a leader in sports performance and Reebok which is American leader in sports and lifestyle products. With its broad portfolio of brands, including Adidas, Reebok, TaylorMade, 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 (8).
A more complete product offering 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 (8).
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 recognition 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 CupTM and the Beijing 2008 Olympics. 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 (8).
Enhanced R&D capabilities and cutting-edge technology. Adidas was well known for its cutting-edge technologies and Reebok for its talented research and development professionals who 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 expected to accelerate new product introductions in footwear, clothing and hardware to improve brand awareness and consumer demand across all brands (8).
Financial aims of the merger:
Group expected to earn higher return than cost of capital in three year time (8).
Strong operating cash flow. Group expected to reduce its debt and improve its cash flow from operational synergies (8).
Group aimed to reduce its annual cost and wanted to save around â‚¬ 125 million annually with substantial operational synergies. And expected to increase revenue and profit from complete coverage of all consumer segments (8).
Extend of merger success:-
After the acquisition Adidas group financial accounts show significant improvements. The Adidas Group’s 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. â‚¬3308 million in first half of 2006 as compare to â‚¬ 2816 million in first half of 2005. (8). While the year 2006 complete annual report shows a fabulous result for the Adidas group. Sales revenue increases by 52 percent i.e. from â‚¬ 6.636 billion in 2005 to â‚¬ 10.084 billion in 2006 (9), representing the highest organic growth of the Adidas group within last eight years. It was the first time in the group’s history that it crossed the benchmark of â‚¬ 10 billion. (8).
2006’s growth in sales revenue carried on in 2007 and 2008 also. The firm in 2007 reported 2.1 percent i.e. from â‚¬ 10.084 billion in 2006 to â‚¬ 10.299 billion in 2007 in euro terms. (10). And in 2008 group recorded 5 percent growth in euro terms, i.e. from â‚¬ 10.299 billion in 2007 to â‚¬ 10.799 billion in 2008. The result was supported by strong sales growth in the Adidas and TaylorMade Adidas golf segment. (11).
Financial aim of the merger to reduce the operating cost through substantial operational synergies seemed to be achieved as the firms had 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 â‚¬ 3.197 billion in 2005 to â‚¬ 4.495 billion in 2006. And operating profit increase by 24.5 percent i.e. from â‚¬ 707 million in 2005 to â‚¬ 881 million in 2006. Inspite of increase in profit groups gross profit margin 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 declination was reported due to first time consolidation of the Reebok business, which carried a significant lower operating margin than the group average. (9).
In year 2007 and 2008 companies gross profit margin and operating profit margin increased due to cost saving which resulted from the combination of Adidas and Reebok sourcing activities as well as underlying improvement in all segments. As a result gross profit margin increased by 2.8 percent in 2007 reaching 47.4 percent as compared to 44.6 percent in 2006 (10), 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. (8). Group gross profit also increased by 9 percent in 2007 and 8 percent in 2008 reaching a level of â‚¬ 4.882 billion in 2007 and â‚¬ 5.256 billion in 2008 (11). The groups operating profit margin increased by 0.5 percent in 2007 reaching 9.2 percent as compare to 8.7 percent in 2006 (10), 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 â‚¬ 881 million in 2006 to â‚¬ 949 million in 2007 and by 13 percent in 2008 reaching a level of â‚¬ 1.070 billion (11).
Adidas aimed to extend their global reach. Merger’s aim to expand in Asia market and to generate more revenue from Asia market seemed to succeed as the sales revenue from Asia market improved. In 2005 sales from Asia contributed 22.95 percent of the group total revenue which increased to 24.65 percent in 2008 (appendix 1, 1). And sale has increased significantly in Latin America which had contributed only 4.88 percent of total revenue in 2005, increased to 8.26 percent in 2008(appendix 1, 2) .
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Company’s main aim to compete with Nike in North America market didn’t hit the target, as the revenue generated from North America went down. Although in 2006 group revenue from North America increased significantly from â‚¬ 1561 million in 2005 to â‚¬ 3234 million in 2006 i.e. 107 percent growth, but this was mainly due to 2006 FIFA world cup and group revenue from North America declined thereafter. (8). In 2007 it decreased by 9 percent reaching â‚¬ 2929 million (8), by 14% in 2008 touching â‚¬ 2520 million (8). In addition after acquisition both Adidas and Reebok lost US market share of athletic shoes. Adidas held 10.62 percent market share in 2006 which went down to 6.93 percent in 2007 and 5.86 percent in 2008. And Reebok held 4.68 percent market share in 2006 which went down to 4.43 percent in 2007 and 2.66 percent in 2008. On the contrary Nike’s market share has increased from 29.73 percent in 2006 to 31.52 percent in 2007 and 34.61 percent in 2008 (7).
Other shortfall of the acquisition can be seen from the declined sales revenue of Reebok. Reebok sales went down by 9 percent in 2006 i.e. from â‚¬ 2718 million in 2005 to â‚¬ 2473 million in 2006 (8), it decreased by 6 percent in 2007 reaching â‚¬ 2333 million (8) and declined by 8 percent in 2008 reaching a level of â‚¬ 2148 million (8). As compared to 2005 Reebok sales declined by about 21 percent after the merger till 2008 and showed very poor performance by Reebok and Adidas group’s inability to maintain Reebok efficiently.
Adidas and Reebok merged together to compete with Nike in North America and to increase their sales revenue and reduce operating costs through synergy of operation and to expand into Asia’s market. Merger’s main aim to compete with Nike in North America market was a failure as both Adidas and Reebok lost their market share after the merger. But at the same time merger was successful in its other prospects of increasing sales, cost reduction and expansion into new market, creating a new value to the merger. So, it seems to be a perfect example of Hay Group, Dangerous Liaisons study which finds out that most of the companies fail to achieve their main objective and create new value to the merger.
(3) http://www.casestudyinc.com/Adidas-Reebok-merger-strategy 01-03-10
(4) http://www.businessweek.com/bwdaily/dnflash/aug2005/nf2005084_8340.htm visited 01-03-10
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