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09/25/2008
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Adidas Ltd: AG’s acquisition of Reebok International Ltd

  1. Overview.
  2. Synergies.
  3. Benefits.
  4. Competition.
  5. Risks.
  6. Regulatory Issues.
  7. Other Considerations.
  8. Valuation.
  9. Financing and transaction structure.
  10. EPS Impact.
  11. Conclusion.

On August 3, 2005, European sports shoe maker (based in Germany) Adidas-Saloman AG's acquisition of Reebok International Ltd. was announced. The market's reaction was cautiously positive to the news, with Adidas' share price appreciating by 7.5%. The CEOs of the two companies considered the merger a natural deal that would bring together the world's second and third-largest sporting shoe and sports accessory companies, positioning the merged entity to better compete with the industry leader, US-based Nike. This optimism stemmed from the complementary nature of the two brands in terms of brand positioning, global presence, market share, consumer segments, and distribution. The strong complementarities between the two business models provided a significant opportunity for increased value creation. The combination was expected to enable Adidas Group to generate substantial cost savings as well as incremental revenue and profits from more complete coverage of all consumer segments.

[...] The high debt ratio placed Adidas at risk of being unable to improve its operating efficiency enough to meet the burdens of the increase in debt; however, the company has been successful enough to meet its obligations. EPS Impact Taking an optimistic view, EPS growth was expected to grow by 16% above industry average) from 2006-2010; however, in 2006 it was estimated to have a impact on EPS. In a worst-case scenario without synergies on sales or costs, it would have a dilutive impact on EPS of in and in 2008. [...]


[...] According to CommerzBank's report, the company's profit margin was only expected to drop in 2007, while the actual profit margin dropped by (from to 44.6 Risks The risks in this acquisition were substantial, and included limited cost synergies, the loss of a strong brand identity for both brands, and potential lower combined growth than each firm could have realized independently. The largest risk was that without optimal integration, the cost savings synergies might not be properly realized. In the worst case scenario, the risks could even reduce or discredit the brand positioning of both companies in the distinct market segments they cater to. [...]


[...] This proved the merger has created revenue synergies for Adidas and has accomplished their goal of increasing its market share in the North American region (sales have increased by 107%). However, gross margin has seen a decline of 3.6 percentage points to of sales in 2006, which was the reflection of the first-time consolidation of Reebok. Reebok has a significantly lower gross margin than Adidas’ average, because of its strong presence in North America, where gross margins are lower compared to other regions. [...]

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