Just doing it

Trainers, sneakers and sports shoes

Aug 4th 2005
From The Economist print edition

Adidas buys Reebok to beat Nike

IN 1997, Adidas stumbled in its deal-making, when it squandered $1.4 billion on Salomon, a French maker of ski- and golf-equipment. In May, it sold Salomon for $625m. Yet the German maker of sports shoes does not give up easily. On August 3rd, it said it will buy Reebok, an American rival, for €3.1 billion ($3.8 billion). If all goes to plan, this joining of the industry's numbers two and three will enable them to mount a serious challenge to the now undisputed leader, Nike.

Now with 35% of the market, Nike has dominated the industry for years. It is the hippest of sneaker makers, using Michael Jordan, Tiger Woods and other sports celebrities with global appeal to market its brand. With its solid, but more pedestrian, reputation Adidas has won 15% of the market. Reebok, in third place, has long tried (not terribly effectively) to outcool Nike, not least in its trainers for women.

Being bigger should help Adidas in price negotiations with manufacturers in Asia, and in negotiations about shelf space and other sales issues with retailers in America. Reebok's main attraction is its 12% share of the market in America, where it also has deals to supply all the major sports leagues. “They are strong in America, we are strong in Asia and Europe,” says Herbert Hainer, the boss of Adidas.

Yet most analysts are sceptical about the deal. Adidas is buying a firm with lower profit margins, lower returns and a tired image. In February, hoping to attract younger buyers, Reebok launched a marketing campaign (“I am what I am”) using pitches by celebrity entertainers and athletes. One ad, featuring “50 Cent”, a controversial rapper, was pulled in March amid complaints that it glorified gun violence.

The analysts think the price is too high and the synergies too small, especially as the two firms seem reluctant to generate some obvious ones. Mr Hainer says he expects to cut costs by €125m in the next three years by sharing information technology, synergies in sales and distribution, and cheaper sourcing. Yet the new combined company will continue to run separate headquarters and sales forces, and keep most distribution centres apart. In a successful takeover, one plus one should make three, but in this case one plus one makes two and maybe a bit, says Gavin Finlayson of Commerzbank.

The takeover should also make Adidas less vulnerable to a possible appreciation of the American dollar or, more likely, of China's yuan. In recent years, Adidas has benefited greatly from the strength of the euro—selling goods mainly inside the euro zone, while subcontracting most of its manufacturing to China and Vietnam.

As for Adidas becoming the industry leader, Nike is unlikely to be quaking in its Air Jordans. Size has helped, says Margaret Mager of Goldman Sachs, because Nike has used it smartly, concentrating its vast resources behind a single brand.

Nike is unlikely to launch a rival bid for Reebok because of likely antitrust objections from regulators in America. But it could be tempted to buy Puma, another German rival. Both Adidas and Puma were set up by the Dassler family. Adidas takes its name from Adolf, or “Adi”, Dassler, whose brother, Rudolf, founded Puma. Both are based in Herzogenaurach, a small town in southern Germany. And both may soon have an American partner.

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