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

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.

PUMA FACTOR. "Nike manages to stay credible in that world by making undeniably hot product with some of the most talented and respected talent in their respective space," says Josh Taekman, president of New York City marketing firm Buzztone.

Adidas has been feeling the heat not only from Nike in its core categories, like soccer, but also from No. 4 sporting-goods brand Puma (PMMAY ), which just unveiled aggressive expansion plans through acquisitions and entry into new sportswear categories.

This makes it all the more logical for Adidas to concentrate on higher-margin, innovation-driven shoes as it leverages Reebok's distribution and product development resources to increase its presence into basketball, hockey, and fashion/athletic segments like bicycling and skateboarding where consumers have proved willing to pay top dollar for high-end shoes.

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