Reebok and Adidas: A Good Fit

Their merger could put the combined outfit on the fast track. Then again, Nike may still prove to agile to catch

By David Kiley

It makes too much sense not to happen. A combination of Reebok International (RBK ) and Adidas-Salomon AG (ADDYY ), announced Aug. 3 by the two companies, is one of those mergers with which it's difficult to find fault.

Germany's Adidas-Salomon agreed to buy Reebok International for 3.1 billion euros ($3.78 billion), or $59 a share -- a 34% premium over the $43.95 at which its shares closed the day before the announcement. Adidas has a market capitalization of about $8.4 billion, and reported net income of $423 million last year on sales of $8.1 billion. Reebok reported net income of $209 million on sales of about $4 billion.

GROWING SHADOW.

  The objective of the tieup is clear. The two companies, which jockey for No. 2 and No. 3 slots behind Nike (NKE ), view their prospects for competing against the Beaverton, Ore., behemoth as better together than apart.

In Europe especially, the shadow of Nike grew larger in the last year as the U.S. company surpassed Adidas in the soccer shoe segment for the first time -- for Adidas, a game-changing event equal to, say, Toyota (TM ) surpassing Ford (F ) in U.S. sales.

In the U.S., Nike reigns supreme. In 2004, it had about 36% market share in the athletic-footwear market, according to the Sporting Goods Manufacturers Association International, while Adidas has 8.9% of the U.S. market and Reebok 12.2%. The U.S. ranks as the world's biggest athletic-shoe market, accounting for half the $33 billion spent globally each year on athletic shoes.

SURGING STOCK.

  "North America is the market where you have to be," says Adidas Chief Executive Herbert Hainer. "We will expand our geographic reach, particularly in North America, and create a footwear, apparel, and hardware offering that addresses a broader spectrum of consumers and demographics."

Hainer has said that Adidas wants to be the clear No. 2 in the sporting goods market worldwide, and it has achieved that position pretty much everywhere except in the U.S.

Investors seem willing to believe the combined companies can give Nike a challenge. After the merger announcement, Reebok closed up $13.19, or 30%, to $57.14. Adidas shares closed up 7%, to $192.96, in Frankfurt.

HIP-HOP NATION.

  The companies say they have already identified about $150 million in annual savings from their combined operations. But the real test of success for Adidas' acquisition is how well the company manages its new portfolio and executes new products and marketing plans that allow the two big brands to complement each other rather than duplicate efforts.

Reebok and Adidas have been targeting NBA players and hip-hop artists for endorsements and product identity co-branding. Adidas has a successful line of shoes and apparel going with singer Missy Elliott, while Reebok's lines built around rap stars Jay-Z and Fifty-Cent are outselling shoe lines developed around its National Basketball Assn. stars.

One strong possibility, say analysts, is Adidas concentrating on upper-end performance shoes, while Reebok covers the middle-priced market. Steve Lauletta, president of marketing firm Radiate Sports Group, says he could see Reebok maintaining its focus on its apparel licensing with the National Football League and the NBA, for example, while Adidas concentrated on selling performance shoes in those sports where its brand value trumps Reebok's.

SINGING PRAISES.

  "These are two mega brands, each with great strengths, and they have to decide how to make the most of their strengths," says Lauletta.

Even though Nike doesn't do as much direct marketing to the urban market as its competitors, it is still a force with that audience. Long-term deals with Michael Jordan and Tiger Woods have made Nike iconic with urban consumers and sports kids.

While Reebok and Adidas build product lines and marketing campaigns around rappers, Nike reaches out to the hip-hop world with deals smaller in scope but just as effective. Nike partners with designers and record labels for special-edition sneakers in its Air Force 1 and Dunks lines. Hip-hop artist Nelly wrote a song about his Nike Air Force 1's that was not commissioned by Nike. That's how strong of a cultural grip Nike has on this $3 billion basketball market. By David Kiley

DIFFERENT CULTURES.

  "I would watch the execution of the integration very carefully, because it won't be easy to integrate the businesses -- Adidas' focus is on sport, but Reebok's is on lifestyle," says Volker Riehm, fund manager at Activest.

While the combination of Adidas and Reebok looks terrific on paper, successful mergers need to work between real people who, in this case, will have to break down cultural differences between companies with "two hugely different cultures,'' says Jeffrey Bliss, president of Javelin Group, a sports marketing firm and a former New Balance executive. "The German mentality of control, engineering, and production, vs. the U.S. marketing- driven culture...in reality, I don't think [the merged company] is going to dent the market, because Nike is already too far ahead."

Nike, Adidas, and Reebok have been gaining sales and profits from a favorable market in the U.S. and abroad for fashion with strong brands. In the annual Interbrand/Business Week ranking of the Top 100 Global Brands, Nike placed 30th overall in the world, with a value of $10.1 billion, up 9% from last year, while No. 71 Adidas was up 8%, to $4 billion. The ranking, which measures the value of brands over the next five years based on sales and profit outlook, did not include Reebok.

SECONDARY BRANDS.

  Acquiring Reebok also gives Adidas an important asset in growing its brand in developing markets, especially in the fashion-oriented markets of Asia like China, Korea, and Malaysia. Having Reebok means that Adidas doesn't have to spread the Adidas brand far and wide to cover all China segments, in which Reebok has made great strides with its Yao Ming marketing tieup.

Both companies have struggled trying to acquire and develop flanker brands. Adidas sold its Salomon winter sports brand last May for less than half what it paid for it eight years earlier. But Adidas still owns golf brand Taylor Made.

Reebok has had unsuccessful diversifications with brands Avia and Frye boots, though it's done well with Rockport and Greg Norman brands. "Adidas is the perfect partner for Reebok," says Paul Fireman, Reebok's chairman-CEO. Fireman, who holds 17% of the sports-shoe maker along with his wife, Phyllis, has already signaled he'll sell his shares.

PAST MONEY WOES.

  Fireman says Hainer first broached the idea of a merger when they met at the Athens Olympics last summer. It marked the beginning of a long process. "This wasn't something I was going to hand over to just anyone," says Fireman, Reebok's founder, who says he wanted to take a long time to get to know Hainer better.

Hainer and Fireman had "more than one meeting" over a period of months, including one around Christmas. Then, about three months ago, "when the idea became more real, we started to accelerate the meetings." Fireman says he will stay on as CEO until the deal closes. Then he plans to look for a successor, but not to do too much "heavy lifting."

Each company has had past financial difficulties. Adidas nearly went bust in the early 1990s before French financier and advertising mogul Robert Louis-Dreyfus rescued it. He restructured the company, hired designers and marketers outside of Germany, and sharpened the company's marketing.

NO SHOE-IN.

  Reebok, meantime, was sagging in the late 1990s despite a robust U.S. economy. Its share price dropped below $10, its designs failed to catch on, and Nike ran away with brand cachet in the U.S. "performance-driven" culture.

Nike will remain a formidable rival. Jim Davis, CEO of New Balance, says that it will be tough for retailers dealing with a new pumped-up Nike competitor. Adidas will have more leverage, he says, but it won't make Nike any easier to compete against. "You can try to take on Nike, but...Nike is Nike and will continue to be Nike," says Davis.

Adds Goldman Sachs analyst Margaret Mager: "We fail to see how this combo will erode Nike's franchise as the global brand leader." Kiley is Marketing editor for BusinessWeek in New York

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