An Adrenalin Rush At Adidas

Its deft Salomon deal puts archrival Nike on notice

After Robert Louis-Dreyfus clinched a deal on Sept. 15 to buy French sports-equipment maker Salomon, he celebrated with Salomon family members over champagne at Geneva's swank Hotel des Bergues. The Adidas CEO had reason to gloat a little. In one deft stroke, Louis-Dreyfus has broadened his sports company's product base and balanced its geographic reach. With better insulation against fickle swings in fashion and regional downturns, Adidas will be a much stronger competitor in the $100 billion global sports-equipment market. "We're getting into the big boys' playground," says Bernard Salomon, son of retired company founder Georges and head of the Mavic bicycle-components division.

Actually, the playground looks more like a battlefield. Adidas and archrival Nike Inc. are squaring off to see which will dominate the sporting-goods market in the next century. While Louis-Dreyfus, 51, executed a stunning turnaround of the German company beginning in 1993, he has watched industry behemoth Nike expand aggressively outside its U.S. stronghold. But now, he has outmaneuvered Nike in the rush to diversify from shoes and apparel--a crucial strategy that may push Nike to look for more acquisitions. "The fight is just beginning," says analyst Thomas Jokel of Bank Julius Baer & Co.

BIG SPENDER. Adidas' $1.3 billion purchase vaults it past Reebok into the No.2 spot worldwide. The combined company, to be called Adidas-Salomon, will have sales of about $3.4 billion. Salomon, which makes ski gear, golf clubs, and bike components, will boost Adidas in Asia and North America, where it is weak. And the combined company's reliance on the slow-growing European market will decline, since sales there will drop to 60% of the total, down from 66% for Adidas before the merger.

To be sure, Nike remains the industry leader and the company to beat. Its annual sales of $9.1 billion, up 42% from the prior year, dwarf those of all rivals. It will outspend the new, bulked-up Adidas 2-to-1 on marketing and promotions, with annual outlays of about $1.1 billion. One of Nike's most valuable assets is the stable of superstar athletes who promote its Swoosh trademark, from golf phenom Tiger Woods to basketballer Michael Jordan.

But Salomon's product line gives Adidas a new edge. The company makes finely engineered products that command premium prices and deliver higher margins than T-shirts or sneakers. They also attract attention from upscale consumers. For instance, two years ago, Salomon introduced thicker "bubble" shafts in its Taylor Made golf-club brand that give a player's swing more power. Sales have surged, and Taylor is the No.2 brand in the U.S. What's more, Salomon's bindings are the industry standard for both downhill and cross-country skis. One-fourth of Adidas-Salomon's sales will come from such high-margin products, vs. just 5% for the stand-alone Adidas.

Nike, meanwhile, has had limited success with its diversification strategy. Several years ago, the company bought Bauer, a Canadian maker of hockey skates and accessories. When Nike introduced a new hockey stick with an ergonomic, finger-fitting handle, skaters yawned. "It's a nice idea, but it doesn't make anybody throw out their old hockey stick," says John Horan, publisher of the newsletter Sporting Goods Intelligence. Shoes and clothing still make up 95% of Nike's sales.

FIERCE RIVAL. Although Adidas still won't be able to match Nike's marketing muscle, its spending will probably become more efficient. For instance, it may introduce Taylor Made golf bags and apparel, so spending on the brand will cover a wider range of products.

Investors seem to agree this deal will make Adidas a more formidable competitor. Initial concern over the new debt the company will run up to pay for Salomon stock passed quickly. Analysts said Adidas-Salomon's annual free cash flow of about $225 million would easily service the debt. After dropping at first, Adidas stock price rebounded on Sept. 17, closing 7% higher, at $132.

So far, Adidas hasn't been able to steal much market share from Nike. Instead, the fight between the titans is costing smaller players, say analysts. In Japan, where Nike is No.1, local brands such as Asics have lost share. And in the U.S., Fila's order book for the next six months has dried up. Louis-Dreyfus knows all too well, however, that he must keep his eye on the ball--the one emblazoned with a Nike Swoosh.

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