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This article is written by Asmita Topdar pursuing Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from Lawsikho.

Introduction

The sports industry, in the year 2006, witnessed the merger of two cutthroat competitors, Adidas and Reebok, through a friendly takeover with the aim to take on their common rival and market leader, Nike. On August 3, 2005, the acquisition deal was announced for $3.8 billion which resulted in spiking of the share prices for both companies. The share price of Adidas recorded an increase by 7.4% from €147.52 on August 02, 2005, to €158.45 on August 03, 2005, on the Frankfurt stock exchange, while Reebok’s share price at the New York Stock Exchange rose to $57.14 from $43.95 on August 03, 2005, resulting in an increase of 30% within one day. The primary goal behind this deal was to join hands and compete against their common rival together instead of competing individually. However, the merger did not turn out the way it was expected to be and after 15 years of collaboration, the Adidas-Reebok gambit failed to revive its expectant glory and is currently on the path of divestment. 

This article discusses the Adidas Reebok deal, the objectives behind the acquisition, the reasons behind its failure in both the global and Indian market and finally about the divestment of Reebok by Adidas.

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Before diving into the merger deal, let us first look into the history behind the formation of Adidas and Reebok.

The history behind formation of Adidas and Reebok

Adidas, a German company having its headquarter in Herzogenaurach, Germany, was founded by Adolf Dassler. Adolf Dassler, on his return from World War I, started producing his own sports shoes in his mother’s wash kitchen. By the year 1924, he was accompanied by his brother Rudolf Dassler, and together they started their business under the name Gebrüder Dassler Schuhfabrik (Dassler Brothers Shoe Factory) which successfully hit its target market and sold 2, 00,000 pairs of shoes each year before the start of World War II. However by 1948, due to the rift between the two brothers, Rudolf Dassler went on to form Puma while Adolf Dassler formed Adidas. Adidas made its name in the international market by sponsoring athletes in the Olympics. Today, Adidas is the largest sportswear brand in the European market and stands second in line after Nike, in the international market. 

Reebok is a US-based company having its headquarter in Boston, Massachusetts in the USA. J.W Foster designed some of the earliest running shoes having spikes to aid the athletes to run faster. He became famous for his “running pumps” and pioneered the use of spikes. He was soon joined by his sons in the business when J.W Foster and sons were formed. Reebok was formed by J.W Foster’s grandsons Joe and Jeff in the year 1958 in Bolton. The year 2000 was a successful year for Reebok when it partnered with athletes and landed a 10-year contractual deal with NLF. In 2001, Reebok became the exclusive outfitter for 29 NBA teams. In 2006, Reebok was acquired by Adidas. 

What was the acquisition deal between Adidas and Reebok?

In the 1990s and 2000s, the sports industry was witnessing burgeoning merger and acquisition deals with Nike acquiring Converse for $305 million in 2003, Adidas acquiring the Solomon group in 1997 and the Hockey company being acquired by Reebok for $330 million. These deals were an indication of the booming sports industry, especially in the US market. On August 3, 2005, Adidas made an announcement regarding the acquisition deal wherein Adidas would acquire Reebok. According to the press release issued by Adidas, in pursuance of the deal, Adidas would acquire all the outstanding shares of Reebok for the U.S. $59.00 per share in cash. The transaction was valued at the U.S. $3.8 billion including the assumption of net cash of $84 million with Paul and Phyllis Fireman consenting to vote their 17.5% of shares in favour of the offer. The offer price represented a premium of 34.2% over the closing price of Reebok’s stock as of August 2, 2005. The acquisition was financed by a combination of debt and equity. On January 24, 2006, the deal got the green signal from the European Commission and on January 31, 2006, the acquisition deal was finally closed.

The primary objective behind the acquisition was to expand their geographic reach, particularly in the North American market. The acquisition was indeed planned with a strategic sense providing the new collaboration with a larger geographic presence, worldwide reach, a greater variety of products and more recognition among consumers thereby giving a competitive platform to take on the market leader, Nike. In 2004, Reebok had a 9.6% global market share while Adidas had a 15.4%. Together, they were better placed to take on the formidable rival Nike which had the crown with 33.2%. The acquisition was planned to aid Adidas to grow big by getting a 20% share of the US market and thus giving a better competitive edge to challenge Nike on its home turf.

What were the objectives behind the Adidas-Reebok deal?

Paul Fireman, the chairman and CEO of Reebok had said – As an aspirational global sports performance and lifestyle brand, Reebok’s mission is to enrol global youth through sports, music, and technology. This complements Adidas’s mission to be the leading sports brand in the world with a focus on performance and international presence. Due to the complementary nature of both the companies in a variety of products, consumer base and geographical market, this deal was aimed to increase value creation, cost savings, improved revenue, and profits and for providing complete coverage of all consumer products for the target customers. The deal was beneficial in two folds – strategic and financial – which are as follows:

  • Developing Global presence and maintaining a strong sales profile 

North America comprises 50% of the global sports industry and the intent behind this deal is to leverage the international presence of both companies. This deal would help Adidas to leverage the recognition and presence of Reebok in the North American market, thereby doubling the sales of Adidas products in the North American market to the US $ 3.9 Billion.

  • Improved geographical presence with extended renowned brand portfolios 

The combined nature of the deal will help both the companies to have a wider consumer reach under its broad world-renowned brand portfolios namely Reebok, Adidas, TaylorMade, Greg Norman Collection, Rockport, CCM, MAXFLI, Koho and Jofa. With this broader brand portfolio, Adidas would be able to offer hardware and apparel along with footwear products under its ambit. 

  • Offering complete product coverage in key sports categories

This gambit will help Adidas to cater to a broader consumer base with a special focus on different key sports categories within its ambit, which shall include – American football, basketball, hockey, tennis, golf, soccer, and running. This would give Adidas recognition in the American sporting industry. 

  • Improved research and development tools

The combined nature would aid both the companies to leverage upon each other’s R&D. Adidas is a known and winning technology leader while Reebok has a very talented group of experienced research and development professionals who have developed a distinguished portfolio of breakthroughs product innovations, including the Pump 2.0 and DMX. The gambit will aid Adidas with the innovation of new products and technology thereby giving a competitive edge to contest with Nike. 

  • Return on investment within 3 years

As per the press release, Adidas was expected to make returns over the capital invested within 3 years from the date of closing of the deal.

  • Strong cash flow 

With an aggregate 2004 pro forma cash flow of approximately €671 million (the U.S. $835 million), Adidas expects the combined Group’s financial strength to enable it to reduce debt and continue funding the Group’s established growth initiatives.

Why did the Adidas-Reebok deal fail?

In 2006 at the time of acquisition, Adidas had a strong market presence on its home turf in Europe but was struggling to gain hold in the American market. Prior to the acquisition, Reebok had a stronghold in the American market and was on the path to give strong competition to Nike, when it got acquired by Adidas. With the intention to grow big and improve its presence in the American market, Adidas acquired Reebok. Post-acquisition, the market share of Adidas and Reebok jointly stood at 20% giving them the edge to compete with Nike, which then had a 40% share in the market. However, after the closing of the deal, there were no signs of any stellar performance from the combined entity, as was expected by the top executives of both companies. 

Post-acquisition, the first-quarter financial reports of Adidas published in March 2006 showed an increase in the profits by 26%, however, this increase in profits had no attribution to the acquisition deal. In the same year, Reebok witnessed a dip in its sales by 9% while there was an increase in sales of Adidas by 14%. Again, the last quarter of 2007 witnessed similar trends. Reebok recorded a dip in sales by $1 Billion while Adidas’s total earnings increased by 14%. As suspected by many trade analysts, the initial days of the Adidas – Reebok gambit had started showing signs of instability. Marketing professor and former Coca-cola executive Peter Sealey had also remarked about the deal as – “The message from this deal is – get big or get out”. In 2008, efforts were made to restructure Reebok when it launched EasyTone to enter the Tonight market which became popular in some time. However, the company was still struggling to match its rivals Nike, Adidas and Puma and was placed fourth in line globally.

One of the factors which could have led to the sluggish performance of Reebok was an increase in the promotion of Adidas products. The branded products from Adidas had tripled over the span.  In 2007, Reebok generated nearly a quarter of Adidas’s overall revenue, but in the first nine months of 2020, that was down to 6.9%. Reebok’s net sales fell 7% in the third quarter of 2020 to 403 million euros ($488 million), after falling as much as 44% the preceding quarter. The enhanced focus on the products of Adidas with declining promotional and marketing activities for Reebok could have added to its sluggish performance. Further, prior to acquisition in 2001 Reebok had landed a 10-year sponsorship contract with NBA. However, due to some changes in the contract pursuant to the acquisition deal, the collaboration with Reebok came to an end with Adidas getting the contractual deal with NBA for 11 years. This was another reason which added fuel to the fire when Adidas replaced Reebok thereby improving its market presence through promotional activities. 

In 2016, Adidas CEO Kasper Rorsted introduced a turnaround plan for Reebok called ‘Muscle up’ and invested in high profile celebrity collaborations with Gal Gadot and Victoria Beckham. This action plan had helped Reebok recover its profitability to some extent, however, due to the pandemic, its performance continued to languish as compared to Adidas.  The Adidas- Matt Powell, senior industry advisor of sports at The NPD Group had said – “Reebok acquisition was a failure from the start. The then-Adidas management did not understand the Reebok business model, which led to years of decline, [but] Reebok remains a great brand that can thrive with patience”.

Why did the Adidas-Reebok gambit fail in India?

As Adidas was entering into an acquisition deal with Reebok, the picture in the sports industry in India was entirely different. Different type of dynamics was being unfolded in India in 2006. Reebok was the leading market player and big brother in the Indian market. The American giant was almost double the size of Adidas with a revenue of Rs 354 crore, while Adidas recorded sales of Rs186 crore. Nike, the current global market leader, was then positioned as number three at Rs 99 crore. Puma, the youngest player, who entered the Indian market a decade after Adidas and Reebok, had managed Rs 22 crore in 2006. 5 years after the acquisition, the picture in India remained the same with Reebok continuing as the forerunner. However, due to rivalry between the management of these two companies, Puma overtook Nike to become the third market leader in India with Rs 249 crore revenue in the year 2010. The roles of Adidas and Reebok in the Indian market took a U-turn when Adidas unearthed a financial scam in Reebok’s sales operations in India in the year 2012. The scam was regarding fake sale transactions and concocted financials aimed to meet the proposed targets, resulting in the corporate fraud of Rs 870 crores. Post this finding, the financial year of 2015 reported a decline in the revenue of Reebok to Rs 333 crores while revenue of Adidas surged to Rs. 805.13 crores. This picture has been continuing in India with the latest figures from the financial year 2020 showing the total revenue from operations of Reebok as Rs. 429 crores while revenue of Adidas has spiked up to Rs. 1,198 crores.

Divestment of Reebok by Adidas

After 15 years of collaboration and trying different strategies to revive the lost glory of Reebok, Adidas has now planned to undergo a divestment procedure for Reebok. In March 2021, Adidas had begun with the formal sale process. As of May 12, 2015, Adidas has asked for first-round bids to be submitted in the week of May 10-14 and is expecting China’s Anta Sports and Li Ning to make offers, with Korea’s Fila and U.S.-based Wolverine also seen as possible bidders. The potential bidders may be joined by financial investors including Apollo, Sycamore, TPG, and Cerberus in the bidding process. The company, which was once bought for $ 3.8 billion in 2006, is now expected to bring in $ 1.2 Billion after the divestment. 

Conclusion

In the early 2000s, Adidas had concentrated its reach only on its home turf in the European market and aimed to establish its presence in the North American market. Reebok, on the other hand, was once a supreme market leader on its own rights when it ruled the American market in the 1980s and surprisingly neither Adidas nor Nike was in the race to reign. Reebok had a stronghold and market presence in both the American and Indian markets until it went on the path of being acquired by Adidas. There were many factors that led to the sluggish performance of Reebok which resulted in the ultimate failure of the acquisition deal. Over the years, Adidas as a brand had grown at a much faster rate with an enhanced focus in the innovation, promotional and marketing activities as compared to Reebok. Also, other factors like the Reebok financial scam in India, the replacement of Reebok by Adidas in the NBA contract, differences in the management opinions between the two companies, among others have resulted in the failure of the gambit. Presently, Adidas is looking for an ideal purchaser for Reebok. 

The bottom line is that it is still difficult to answer whether Reebok can revive its lost glory post divestment process or will it fade over the next few years. However, we can only expect and hope that Reebok will regain its lost glory one day and will again become popular in the global market. 

Reference

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