Friedrich-Alexander-Universitt Erlangen-Nrnberg Betriebswirtschaftliches Institut

Lehrstuhl fr Betriebswirtschaftslehre, insbesondere Internationales Management Prof. Dr. Dirk Holtbrgge

Success of International M&As: The case of adidas acquisition of Reebok

David Rygl Tobias Dennerlein Tamara Joyette

Working Paper 4/2006

Dipl.-Kfm. David Rygl, University of Erlangen-Nuremberg, Department of International Management, Lange Gasse 20, 90403 Nuremberg, Tel.: +49 (0)911 5302-452, Fax: +49 (0)911 5302-241, e-mail: [email protected], http://www.im-fau.de Tobias Dennerlein, cand. rer. pol., University of Erlangen-Nuremberg. Tamara Joyette, Bachelor of Economics, Concordia University, Montreal.

Success of International M&As: The case of adidas acquisition of Reebok

Topic, Objectives and Structure of the case

In the last few decades, mergers and acquisitions (M&A) have gained in strategic importance as a means of external company growth. Global M&A activity increased as a result of ongoing globalization and the creation of the European Single Market. Given the high economical impact of the increasing number and volume of transactions, it is alarming that more than 50 % of all analysed transactions failed or did not lead to their expected results (Picot 2000, p. 345). Most empirical studies show that shareholders of the acquiring company did not achieve above-average returns and, in some cases, value was even destroyed through these mergers (Lubatkin/Srinivasan/Merchant 1997, p. 77). The failure of most acquisitions may be the result of a number of factors. There is evidence that human (e.g. cultural) factors are seldom recognized as part of the problem, as top managers are mainly concerned with the financial and strategic aspects of a merger. In most cases, little attention is paid to the soft aspects of the transition, such as human resource issues (e.g. intercultural trainings) and the development of a new company culture. JEMISON/SITKIN (1986, p. 107) discern three main problems within the process of an acquisition in itself, which ultimately effect the result of the acquisition: the fragmented views of involved specialists and analysts, the increasing time pressure to close a deal and the inability of buyer and seller to resolve areas of ambiguity. Therefore, the question why some acquisitions fail and others succeed seems to gain more importance with time. The aim of this case study is to describe how adidas, one of the biggest companies in the sporting goods industry, managed the process of acquiring Reebok and how it deals with the ongoing post-merger-integration. The case study is based on five semistructured interviews with senior representatives of the adidas Group. Four of the respondents work in different functional areas of the adidas Group, such as Global PR, Social and Environmental Affairs, Treasury and Sales, and one of the respondents is a top-level manager of Reebok. Apart from these official interviews with top level representatives, it was also possible to get insight into their everyday business practices, as some informal conversations with ordinary office staff have been conducted. Furthermore, company websites, internal material and existing literature were analysed. This case study is structured as follows: In paragraph 2, a brief description of the sporting goods industry as well as the company profiles of adidas and Reebok will be pre-

Success of International M&As: The case of adidas acquisition of Reebok

sented. In paragraph 3, the findings of the interviews will be presented. Furthermore, a discussion of the findings will show some possible interpretations and implications for the success of the Reebok acquisition. Finally, in paragraph 4, a summary of the main findings and suggestions for future studies are provided.

Background: The sporting goods industry, the history of Reebok and the development of the adidas Group

2.1 The sporting goods industry The sporting goods industry is strongly affected by globalization and increasing competition for the following main reasons: First, a continuous trend of concentration in the sporting goods industry can be observed (Handelsblatt 2005a), as several smaller M&A activities in the past two years have been undertaken (Hofer 2006b). Second, there is intense pressure on companies participating in this sector due to campaigns initiated by non-profit and non-governmental organizations (NGOs), such as the Clean Clothes Campaign (CCC) or the Fair Labor Association (FLA) (Hfinghoff 2006; FTD 2006c). Third, the clothing industry is faced with problems associated with piracy, as imitations are found at fairs and on the market every year (Reppesgaard 2006). The sporting goods industry is dominated by three major players: Number one in the market in terms of turnover is Nike with an annual turnover of around 11 bn (Handelsblatt 2005c). Through the acquisition of Reebok, adidas Group became number two in the sporting goods market with an annual turnover of around 9 bn (Handelsblatt 2005c). Puma is now number three in the market, with a remarkable gap between it and adidas, as its annual turnover is 1.7 bn (Handelsblatt 2005c). The gap between adidas and Nike was reduced through the acquisition of Reebok: The revenue of Q1 2006 of adidas was 2.5 bn, while Nike reached 2.8 bn (Handelsblatt 2006b). The net profit of the new adidas Group in 2004 was 450 million (Handelsblatt 2005c). However, in Q4 2005, a loss of 4 million was recorded as a result of high marketing expenses and the costs associated with the Reebok acquisition (FTD 2006a). The sporting goods market segment is characterised by a high level of competition between these rivals, especially in Europe and Japan, where Nike wants to expand its efforts (FTD 2006b). Particularly, in Japan, Nike's business has suffered due to lower-

Success of International M&As: The case of adidas acquisition of Reebok

price competition from Adidas and Asics, better product offering from Asics and the strong move to low-profile products (Foster 2006). Therefore, Nike wants to aggressively get into this category of products (Foster 2006). Puma also has plans to expand into new business segments, such as swimwear in 2007 (Handelsblatt 2006a). Puma announced that it will enter in six new business segments from now until 2010 and it has already presented its own jeans collection as well as products for the golf and motor sports segments (Handelsblatt 2006a). Another example illustrating the high level of competition is the fight between some of adidas rivals and adidas in the matter of positioning its three stripes as design elements on the clothes of athletes: Nike, Reebok and Puma criticised before the International Olympic Committee (IOC) that adidas has been allowed to place its three stripes noticeably on the athletes clothes, while its competitors only have the prescribed 20 square centimetres to position their logos (Handelsblatt 2005b). Later, the IOC stated that company logos including the three stripes must be replaced if they are bigger than the provided 20 square centimetres (Handelsblatt 2005b). Also in the 2006 Wimbledon tournament, adidas had to replace its stripes due to a complaint filed by Nike and Puma (Milne 2006). In addition to the high level of competition, there is also a trend towards concentration in the sporting goods industry. In the past two years, there have been several acquisitions: The Finnish Amer Group bought Salomon from adidas, the U.S. group Quicksilver bought the French winter sports company Rossignol and the U.S. company K2 acquired the Bavarian ski and snowboard brand Vlkl (Hofer 2006b). 2.2 Past and recent situation of Reebok The history of Reebok starts much earlier than the one of adidas. Already in the 1890s, Reebok's ancestor company was founded in the United Kingdom by Joseph William Foster (adidas 2006b, p. 1). He was driven similar to the founder of adidas by a vision derived from a need for innovation: athletes wanted to run faster (adidas 2006b, p. 1). So, by 1895, he was in business making shoes by hand for top runners [and he developed] some of the first known running shoes with spikes in them (adidas 2006b, p. 1). Several decades afterwards, in 1958, two of the founder's grandsons started a companion company that came to be known as Reebok, named for an African gazelle (adidas 2006b, p. 1). The fact that Reebok was a family-owned company constitutes a first historical analogy to adidas, as to be seen below.

Success of International M&As: The case of adidas acquisition of Reebok

Reebok entered the North American market first in 1979, when Paul Fireman negotiated for the North American distribution license and introduced three running shoes in the U.S. (adidas 2006b, p. 1). Only two years later, in 1981, Reeboks sales exceeded $ 1.5 million (adidas 2006b, p. 1). By introducing the first athletic shoe designed especially for women (called the Freestyle) in 1982, Reebok was able to anticipate three major trends that had a high impact on the athletic footwear industry, namely the aerobic exercise movement, the influx of women into sports and exercise and the acceptance of well-designed athletic footwear by adults for street and casual wear (adidas 2006b, p. 1). The effects lead to extensive growth. Thus, Reebok introduced new product categories and became an industry leader (adidas 2006b, p. 1). In 1985, Reebok completed its initial public offering (IPO) and made its first strategic acquisition only one year later, when The Rockport Company was bought (adidas 2006b, p. 1). A few years later, in the late 1980s, Reebok continued its aggressive expansion and focused on overseas markets with the result that Reebok products can now be found in more than 170 countries (adidas 2006b, p. 1). As developing innovative, exciting products has become a guiding principle for Reebok ever since the introduction of the Freestyle shoe, the introduction of The Pump technology marked another cornerstone within this strategy in the late 1980s (adidas 2006b, p. 1). In 1992, Reebok began to change its original orientation in the fitness and exercise sports sector towards all areas of sports and created several new footwear and apparel products for football, baseball, soccer, track and field and other sports (adidas 2006b, p. 2). A further step towards this transition was the beginning of a partnership with golfer Greg Norman, developing The Greg Norman Collection (adidas 2006b, p. 2). An essential decision was made in the late 1990s when Reebok made a strategic commitment to align its brand with a select few of the worlds most talented, exciting and cutting-edge athletes (adidas 2006b, p. 2). With this decision, Reebok made it part of its strategy to focus on those athletes who represent the top echelon of sports and fitness (adidas 2006b, p. 2). This strategic positioning and marketing strategy may constitute a second analogy in the stories of adidas and Reebok. Between 2000 and 2002, Reebok attained some exclusive partnership and license agreements with several U.S. sports associations, such as the National Football League (NFL), the National Basketball League (NBA), the Womens National Basketball Asso-

Success of International M&As: The case of adidas acquisition of Reebok

ciation (WNBA) and the National Basketball Development League (NBDL) (adidas 2006b, p. 2). These deals granted Reebok exclusive rights to supply and market all oncourt apparel, including uniforms, shooting shirts, warm-ups, authentic and replica jerseys and practice gear for all NBA, WNBA and NBDL teams (adidas 2006b, p. 2). In 2002, Reebok launched Rbk, which was the beginning of focusing the companys strategy on individual needs and expectations of consumers. The Rbk collection is designed for the young man and woman who demand and expect the style of their gear to reflect the attitude of their lives: cool and edgy, authentic and aspirational (adidas 2006b, pp. 2). As Rbk is inspired by street fashion, the cultural dimension of Rbks marketing had to be managed adequately as well. By launching a global marketing campaign that fused together sports, music, technology and entertainment, and was designed to connect the Reebok Brand to millions of new consumers around the world (adidas 2006b, p. 3) in early 2002, Reebok became a pioneer, as this was an act the industry had not yet seen. From this moment on, Reebok integrated top athletes as well as some successful hip-hop and rap artists in its marketing activities, which the 2003 formed partnership with rap musician Jay-Z exemplifies (adidas 2006b, p. 3). Through partnerships like those described earlier, Rbk became the sharp edge of the Reebok Brand (adidas 2006b, p. 3), including products of different areas, e.g. lifestyle, apparel, eyewear, hockey accessories. In 2004, Reebok bought The Hockey Company and, therefore, it became the worlds largest producer of hockey apparel and equipment with a long-term licensing agreement with the National Hockey League (NHL), which grants companies permission to serve as supplier to all 30 NHL teams (adidas 2006b, p. 3). Besides the NHL agreement also exclusive agreements with several other hockey leagues exist and Reebok even launched a separate Rbk Hockey line (adidas 2006b, p. 3). In 2005, Reebok concentrated on enforcing its marketing and partnership activities, when launching its largest global integrated marketing and advertising campaign in nearly a decade (adidas 2006b, p. 3), named I Am What I Am. Within this campaign, the entire brands marketing and advertising efforts have been linked in order to encourage young people to embrace their own individuality by celebrating their contemporary heroes (adidas 2006b, pp. 3). In the campaign, several music icons, top athletes and screen stars have been featured (adidas 2006b, p. 4).

Success of International M&As: The case of adidas acquisition of Reebok

2.3 The development of adidas and the acquisition of Reebok The history of adidas, as depicted here, can be vaguely subdivided into four eras: (1) the foundation of the company by Adolf (nickname: Adi) Dassler and its ongoing development until the founders death (1920-1978), (2) the era of leadership through Horst Dassler and the Dassler-Family, and the legal transition period (1978-1989), (3) the turn-around period and going public under the French-born chairman of the executive board Robert Louis-Dreyfus (1993-2001), and (4) the era of a new global strategic positioning under the leadership of Herbert Hainer (2001-today). Adidas was established in 1920, when its founder Adolf Dassler had the vision to provide every athlete with the best possible equipment (adidas 2006a, p. 2). He was driven by this vision until his death in 1978 and, thus, 700 patents and other industrial property rights worldwide [emerged] () of his permanent quest for perfection (adidas 2006a, p. 3). The following statements describe Adi Dasslers characteristics and, as a matter of fact, they still can be found in the present company culture, organizational structure and corporate policy: A passionate athlete himself (), Adi Dassler strove to specialize and optimize his products, Adi Dassler was the first entrepreneur to use sports promotion in order to make the public aware of his innovations. He started using well-known athletes as advertising for his products. Many famous athletes such as Jesse Owens, Muhammad Ali () and Franz Beckenbauer counted themselves among the friends of the Dassler Family (adidas 2006a, pp. 3). Adi Dassler created the brandname in 1948 by using the first syllables of each his first and his last name and he registered the Three Stripes as a trademark only one year later, in 1949 (adidas 2006a, p. 2). After his death in 1978, Adi Dasslers widow Kthe and his son Horst continued running the company (adidas 2006a, p. 4). During this second era of leadership, it was Horst Dassler who perfected the opportunities offered by sports promotion (adidas 2006a, p. 4) and he turned adidas into a global leader in the sector of innovations in sports marketing (adidas 2006a, p. 5). He also established the brand in France (adidas 2006a, p. 5). In 1987, Horst Dassler died unexpectedly and the company had to face a difficult transition period (adidas 2006a, pp. 4). When the era of the Dassler Family in 1989 ended after almost 70 years, the enterprises legal form was changed into a corporation (Aktiengesellschaft) (adidas 2006a, p. 2). Nevertheless, it still remained in family ownership (adidas 2006a, p. 11).

Success of International M&As: The case of adidas acquisition of Reebok

A third era of leadership can be defined by the period when Robert Louis-Dreyfus was on duty. He had been Chairman of the Executive Board from April 1993 to March 2001 (adidas 2006a, p. 2) and initiated the comeback of the Three Stripes (adidas 2006a, p. 5). He also realized the going public of adidas in November 1995 (adidas 2006a, p. 2) and, at this time, the adidas share was one of the most interesting new introductions on the stock market (adidas 2006a, p. 5) in Germany. During the leadership of LouisDreyfus, adidas acquired the Salomon-Group in 1997 with its brands Salomon, TaylorMade, Mavic, Bonfire, ArcTeryx and Clich and, thereby, it changed its name to adidas-Salomon AG (adidas 2006a, p. 2). For the acquisition of the Salomon-Group, adidas paid round 1.2 bn and became the second largest sporting-goods producer in the world (Handelsblatt 2005a). The fourth era of leadership started in 2001, when Herbert Hainer became Chairman of the Executive Board; since then, he has been leading the Group (adidas 2006a, p. 2). After having bought the Salomon-Group, adidas made various efforts to run Salomon as profitably as adidas and to attain favourable cost as well as scale effects from the acquisition of the Salomon-Group. One last in this sense effort by adidas-Salomon may have been to develop a restructuring program for Salomon by the end of 2004, which intended e.g. the cutting of 160 of 1700 of Salomons offices and a shift of a large segment of Salomon-production to China and Romania in order to bring the turn-around to Salomon (Handelsblatt 2005a). Despite this program, adidas-Salomon never succeeded in making Salomon as profitable as adidas (Hofer 2006a). Further, both turnover and profit of Salomon was declining for a long time: in 2004, the sales of Salomon reached only 653 mill. (group sales: 6.5 billion), while realizing a profit of 9 mill. (group profit: 314 mill.) (Handelsblatt 2005a). Because Salomon performed weaker than anticipated, the management of adidas-Salomon decided to sell the Salomon business segment, including the related subsidiaries and brands Salomon, Mavic, Bonfire, ArcTeryx and Clich () to the Finnish Amer Sports Corporation on May 2, 2005 (adidas 2006a, p. 2; 20). The transaction was completed on October 19, 2005 (adidas 2006a, p. 20). Only the former Salomon golf brand TaylorMade remains in the portfolio of adidas (FTD 2006c). With the sale of Salomon, the groups name has been changed back to adidas AG, which was approved by the stakeholders at the annual general meeting on May 11, 2006 (FTD 2006c). However, when selling Salomon, adidas could not sell it at a suitable price: the sale brought 485 million (Handelsblatt 2005a), which

Success of International M&As: The case of adidas acquisition of Reebok

constitutes only about 40.4 % of the price that was paid for it in 1997. Therefore, on the one hand, the acquisition of Salomon and its subsequent sale might be regarded as an unsuccessful attempt to merger adidas with another sports company. On the other hand, Herbert Hainer argues that, together with Salomon, adidas took over the golf-brand TaylorMade and this brand actually is supposed to be the leading golf-brand in the world (Balzer et al. 2006). Apart from the sale of Salomon, adidas also set the course for other diverse strategic possibilities: in July 2005, a long-term strategic partnership including a license agreement has been signed between adidas-Salomon and Porsche Design Group (adidas 2006a, p. 20) with the aim to jointly establish a hi-tech premium brand in the sports sector (adidas 2006a, p. 20). The first products out of this cooperation will be available worldwide in 2007 (adidas 2006a, p. 20). Further, adidas cooperated with Polar in developing the so-called Project Fusion, the worlds first completely integrated training system that seamlessly integrates Polar heart rate, speed and distance monitoring equipment into adidas apparel and footwear (adidas 2006a, pp. 20-21). On August 3, 2005, adidas-Salomon surprised the public by announcing the planned acquisition of Reebok International Ltd., which would be the biggest transaction within the sporting goods industry of all time (Hofer 2006a). The value of the deal is around 3.1 billion (adidas 2006a, p. 21). With this step, adidas wants to accelerat[e] () [its] strategic intent in the global athletic footwear, apparel and hardware markets (adidas 2006a, p. 21). About six months later, on January 31, 2006, the acquisition of Reebok had been closed, creating the new adidas Group with a footprint of around 9.5 billion ($ 11.8 billion) in the global athletic footwear, apparel and hardware markets (adidas 2006a, p. 21). Hainer praises this step as the beginning of a new chapter in the history of our Group and promises that the new adidas Group will benefit from strong strategic advantages, such as a more competitive worldwide platform, well-defined and complementary brand identities, a wider range of products, and a stronger presence across teams, athletes, events and leagues (adidas 2006a, pp. 21). Through the acquisition, a new Group with more than 25,000 employees worldwide (adidas 2006a, p. 3) was created. In the R&D function, a team of designers, product

Success of International M&As: The case of adidas acquisition of Reebok

developers and experts for biomechanics and material technology () [works] in Portland and at adidas second technology centre in Scheinfeld near Nuremberg (adidas 2006a, p. 3). With a network of over 80 subsidiaries adidas tries to guarantee a high marketplace presence (adidas 2006a, p. 3). The sales and distribution structure is grouped into four regions named Europe/Emerging Markets, North America, Asia/Pacific and Latin America (adidas 2006a, p. 3).

Elements of the acquisition process

The main reasons for the sale of Salomon were declining sales due to the unfavourable snow quality in recent years and the incapacity of adidas to grasp the wintersport business. Therefore, adidas wanted to focus on areas where it has more competence. When selling Salomon, adidas kept the brand TaylorMade, as the golf business is a growing one and high margins can be obtained here. Mistakes during the integration of Salomon have occurred due to significant differences between French and German leadership and organizational structures. Adidas missed the opportunity to strengthen its influence in Salomons structure. Thus, the Salomon management remained too French. In the case of Reebok, this incompatibility is unlikely, as some key positions have already been filled with adidas managers and a more precise analysis of top level management has been undertaken in the pre-merger period. In any case, the three brand headquarters of Reebok, TaylorMade and adidas will remain separated. The acquisition of Reebok has been justified with market motives, as adidas has reached its limits in the U.S. market. There are groups of customers e.g. the so-called black urban kids, who might be seen as rebels and who adidas will not be able to attract in a sufficient way as a European brand. Reebok, however, has a strong presence in the U.S. market and in American sports, such as Baseball, Basketball and American Football. The fact that adidas sought the NBA license agreement is explained by the future positioning of adidas: adidas will focus on team sports and Reeboks orientation will be on the individual consumer. As Reebok plays a minor role in the European and Asian market, adidas can help Reebok to grow in these regions in return. In addition, effects of scale can be expected in areas like sourcing. The key motive for the acquisition may be of a market driven nature, because adidas wanted to expand its presence in the worlds largest sports market, the American market.

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With regard to the fit of the company cultures, it might be assumed that the cultures of adidas and Reebok are very similar. This can be seen from different aspects, e.g. in the shared passion sport that becomes obvious in the way the headquarters are designed: Both headquarters are located in the countryside and are designed in a campus-like style. The adidas headquarters, called World of Sports, offers sporting facilities and courts, a gym, a restaurant (called Stripes) and a pond. With its on-site wellness and fitness center, ATM, Barber Shop/Hair Salon, dry cleaners, travel agency, and on-site child care center (adidas 2006b, p. 7), the headquarters of Reebok offers several amenities to its employees in order to facilitate their work/life balance. The commitment to sports and fitness is obvious on Reeboks site as well: it offers a fitness centre, two aerobic rooms and a NBA regulation-sized basketball court as well as a baseball field, a soccer pitch, a 400-meter Olympic running track that circles through the building, a basketball court, a beach volleyball court, two tennis courts, and a four-acre sports exposition lawn (adidas 2006b, p. 7). In addition to the existence of these facilities, they can also be viewed from any vantage point inside the building, uniting employees with the many sporting and fitness activities that Reebok is associated with (adidas 2006b, p. 7). Another culture-unifying aspect might be the common goal to beat Nike as number one in the sports market. Adidas gave itself the mission statement to be the leading sports brand in the world. Even though there are differences in the national cultures between Americans and Germans, these are considered to be less intense than those between Germans and the French as in the case of Salomon. An explanation could be that adidas already has a multicultural set of employees and, therefore, is very open to diversity. For adidas, diversity is the key to success, as an internal poster in the adidas headquarters clearly states. The company language at adidas is English, which should be another facilitating aspect for the integration of Reebok. Reebok employees do not have the feeling of being absorbed by adidas and, therefore, do not feel like the losers of the acquisition. In this context, it should be mentioned that adidas practiced a very exemplary and transparent communication policy towards all of its new employees. Herbert Hainer visited the Reebok headquarters and spoke to the entire team there. Furthermore, a specific intranet site was created where employees were kept informed during all phases of the acquisition. Also, video conference files of both CEOs were available for download. All

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of these efforts nurtured a strong sense of belonging for the Reebok employees. Therefore, Reebok employees might already have a greater sense of belonging to the adidas Group than Salomon employees ever had in their day. Adidas also communicated to Reebok employees that the aim of the acquisition is not a reduction of jobs in Reeboks structure and showed that, in the future, there will be investments in Reeboks headquarters. Other lessons learned out of the Salomon deal could explain why, in the case of Reebok, integrative structures were designed right from the start. Every person involved in the acquisition process was asked to give her/his expertise for the respective company function, in which she or he was actively participating. In the Social and Environmental Affairs (SEA) department, for example, the manner, in which the efforts of both companies in this sector could be integrated into one central structure, was verified. Reebok bundled its efforts into the so-called Human Rights Program. Similarly, adidas has implemented certain codes of conduct in order to ensure socially acceptable conditions in its production facilities all over the world and along its whole supply chain. Eight integration work groups have been appointed in order to think of all content-like aspects of the integration work, such as unification of group-wide standards (like codes of conduct, mission statements, audit protocols for suppliers, etc.) and unification of groupwide reporting systems. From the beginning of the year 2007 onwards, SEA will work as one unified comprehensive structure on a group level, and a separation of brand activities will not exist anymore. Former adidas and Reebok activities will be integrated and completely linked in a regional approach with the three main regions Asia Pacific, America and Europe/middle East/Africa. The Reebok Human Rights Program will be disintegrated, but its individual aspects will be integrated in the regional structure of the adidas Group. Further, communication measures during the acquisition process have been perceived as very exemplary by SEA. For example, the development of the mood and feelings of the employees is monitored in the following way: in periodical intervals, certain sets of employees (a mixture of all hierarchies) are surveyed using a list of about eight questions in order to understand how their feelings about the acquisition are developing. These surveys are called pulse-checks, using a term out of the field of sports. It was conceived in order to get an idea of how the pulse beat of the employees or the whole company is, concerning the acquisition. These pulse checks, therefore, act as an indica-

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tor for the top level management, as they allow a prompt reaction to the emotional development of employees during the integration process. Also, the human resource (HR) department worked strongly together with the management of other departments in order to develop key messages and to communicate information to interested employees regarding diverse topics, such as what will happen next and where will the path of the company lead to. It can be argued that the SEA sector of both companies matches in an ideal way: both companies had to meet the same challenges in the past and both companies developed similar answers to these challenges. Therefore, the systems and thinking patterns are equivalent. Thus, SEA almost offers an integration of the companies and this has been executed in a timely manner. In general, the acquisition of Reebok has been perceived in a positive way, as the enlargement of the group can ensure its long term strategic success by creating scale effects and growth in new regions. Furthermore, in the Salomon deal, the varying mindsets of German and French managers were seen as the main problem in the Treasury department. The management of Salomon did not match very well into adidas culture. In contrast, it will be much easier to integrate Reebok, as adidas is very multicultural. In the Treasury department, integration can be achieved very easily and transparently, as the department is centralised. It would be sufficient to release new guidelines concerning hedging, financing and other principles, which are binding for every action of the department. Therefore, an integration of the Reebok Treasury structures will be facilitated. As a motive behind the acquisition from a financial point of view, the earnings of the entity must be greater than the costs of financing. Together with the acquisition bank, a financial due diligence of Reebok was made in the pre-merger period. Further, cost and revenue synergies have been calculated and an integration controlling has been established together with a business consultancy. The business consultancy has set deadlines. It monitors the achievement of objectives and expects accountability in the case of delays. In the Treasury function, there will be a reduction of headcounts and probably of processes. As Treasury is a staff department, posts in the group headquarters in Herzogenaurach will be increased, while posts at Reebok will be reduced.

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Regarding new hires, suspensions and the filling of key positions within the group in terms of the acquisition, a new chief treasurer, who comes from Reebok, will take responsibility in the Treasury department. Therefore, an excellent integration will be achieved here. However, in a number of cases, it will not be so favourable: former adidas managers may be transferred to the U.S. in order to implement the adidas systems and culture there. This seems to be a better policy than in the Salomon case, where the management eventually remained too French. However, no winner-loser relationship or sensation shall be evoked. The common mission statement of the group (as a means of becoming the leading sports brand in the world) will help both adidas and Reebok employees to develop a sense of belonging to one and the same group without creating differences between former adidas and Reebok employees. Analogies of the two companies can be seen in the following aspects: even by observing the design of the headquarters, it can be assumed that the cultures of the two companies are very similar, as they are very sport-oriented. Furthermore, the mentality of adidas and Reebok employees is very similar. However, there are no intercultural trainings offered in order to prepare the employees to the challenge of dealing with different national cultures (the German and American one) in a more comprehensive way than before. The step of acquiring Reebok can be judged positively, as it is a new challenge. Only through facing new challenges can the group survive the intense competition in the market. By acquiring Reebok, it was possible to take a further step towards the goal of outperforming Nike as the number one brand in the sports market. Adidas attempts to become number one in every aspect of its business, such as finance, marketing, innovation, customer satisfaction, etc. Also for the Sales department, the Salomon deal offered less scale effects than the Reebok deal, as the product portfolio was too different and, therefore, no synergies in production and distribution could be achieved. In this sense, Reebok is more compatible to adidas. Effects of cannibalisation between adidas and Reebok products will not occur, as comprehensive marketing or promotional activities can now be coordinated, though the brand management will remain separated. Both brands are regarded prime/triple-a brands. Some managers will be responsible for the sales of adidas. Others will be responsible for the sales of Reebok. In general, the functions which are closest to the consumers, such as sales and marketing, will remain completely separated so that both adidas and Reebok as brands will have their own marketing and sales departments. How-

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ever, departments that are more back-office-like and have a more supportive character (like Sourcing, Logistics, IT, Finance, Human Resources) will be combined in order to gain synergies. In Germany, adidas will integrate all of the Reebok back-office activities, as Reebok is the smaller partner in this scenario. It is important to note that, in other countries, however, it might be managed differently. It must be verified on a caseby-case basis which structure may be modified, as they are evolved structures which cannot be excised unlimited without taking risk of damaging the whole structure. Regarding the culture and behaviour of the employees, it can be stated that the cultures of the two companies are compatible: both cultures can be characterized as very informal, very consistent and similar. Within the Sales integration team, the members quickly adopted their new colleagues and there was no one who had a superior or inferior rank within the team. A very harmonious working atmosphere could be developed, without conflicts deriving from the different national backgrounds. It was surprising how well the team worked together. This positive working atmosphere may derive from the fact that the individuals in this project team were high level representatives, who probably have a high cultural empathy in comparison with normal office staff or workers. Regarding, the filling of key positions within the group, the general procedure is the following: for every position where there are two potential employees (one from adidas and one from Reebok), each of them has to apply for the position in order to identify the one that fulfills the requirements associated to the respective position best. Nevertheless, managers who did a very successful job for adidas (key managers) will fill certain positions within the organization of Reebok in order to implement the adidas culture there. In the Sales department, a fit of business allocation regarding turnover is very important. This seems to be the case with adidas and Reebok, as Reebok has its strengths in the U.S. market, while adidas is stronger in the European market. Therefore, both companies can learn from each other in the respective area or market and each can benefit from the strengths of the other. Regarding Sales, the Salomon deal cannot be compared with the acquisition of Reebok for two main reasons: Salomon had a completely different product line and, therefore,

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the whole Salomon business was completely different from the adidas business. Furthermore, together with Salomon, the TaylorMade brand was bought and TaylorMade is an absolute successful story. The value of TaylorMade today is greater than the whole Salomon-TaylorMade deal at that time. For this reason, the Salomon deal can also be seen positively. During the Salomon period, however, only little integration work was done. However, the Reebok integration was planned with the objective to integrate Reebok in a much more intensive way than it happened with Salomon. Both companies shall now be merged and linked more intensely, which can also be seen in the new hierarchy of the group: there are representatives (brand presidents) for each brand on the first level reporting directly to the CEO Herbert Hainer. Further, there are board members for each company function (CFO, COO; etc.), who report to Herbert Hainer and are responsible for providing services to all of the brands. This is obvious also in the new line organization: front office activities, such as marketing and sales, will remain separated, which is apparent in the executive board structure with its brand presidents. Back office activities (like IT, HR, Operations, etc.) shall be integrated in order to provide the best service to all of the brands. In general, the company cultures of adidas and Reebok are quite similar: both brands are driven by a marketing and innovation approach. Reebok has been founded on the idea to develop product innovations and to constantly revolutionise the market. Also, adidas founder, Adolf Dassler, lead adidas on the same principle: He developed new techniques and innovations in order to introduce these innovative products in the market. Further, he worked with top athletes and implemented a strong sports marketing. Because the approach is strongly product driven in both companies, the way of thinking and the company cultures should fit together rather well. Further, unification will be reached by integrating all processes this will affect the cultural integration in a positive way. Nevertheless, about 90 % of all processes will come from adidas. An example is adidas key managers being posted in certain Reebok positions. Also, the danger of an upcoming winner-loser feeling between adidas and Reebok employees seems unlikely, as Reebok employees realized that, with adidas, Reebok has a new owner who will reinvest in the company and develop the brand. Forced relocation of Reebok employees will not occur, as adidas tries to keep Reebok managers in order to prevent a dreaded brain drain, i.e. the drift of managers and the loss of management know-how and skills. Within a mid or long term perspective, there should be a considerable exchange of adi-

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das and Reebok managers to encourage a better linkage between the company cultures. The American working culture could be more business-oriented and, therefore, more professional than maybe the French one (referring to the Salomon deal). The actual process of integration was managed in the following way: eight integration teams were formed, which are filled with adidas and Reebok managers in a parity proportion. The teams reflected the regional and functional structures of each company. In the teams, cost and revenue synergies for the respective area have been identified. Further, processes, organizational structures and future growth have been analysed in order to develop blue prints for a new common, comprehensive line organization of the new group. These aggregated synergies have been adopted to smaller regional areas and subteams have been charged with verifying the estimated results from their sub-level point of view. In such teams, around 150 employees worked for about six months and have partly been released from their regular positions. After having completed the project, the results must be adopted now and realized within the regular line organization of the group. There has been a project management office (PMO) created with a steering board that controls the progress and achievement of the objectives within certain time limits. These post-merger controls may still be in place for the next 2-3 years. There is a very positive feeling about the way the merger is being managed within management itself. Also, managers who experienced several mergers (before working for adidas) know that a merger or acquisition is always a very complex, challenging and dangerous task. When comparing the integration process with a 100 metres distance, adidas has reached only the 10 metres mark and there are another 90 metres to go. While the first 10 metres have been managed in an exemplary way, the true success of this acquisition is still to be seen. With Salomon products like ski, snowboards, roller-skates, and other outdoor and funsport equipment, it was possible to reach a wider spectrum of customers than with adidas products alone. Reebok, however, covers just about the same sport areas as adidas. Therefore, almost no diversification can be achieved. Effects of cannibalisation between the adidas and the Reebok brand may occur as they operate in the same product fields (Kroder 2006).

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Further, as motives for the Reebok acquisition, market motives have been often mentioned. This motive might appear questionable for several reasons: First, with Reebok, adidas acquired a company that works less profitable than itself (Hofer 2006b). The operational margin of adidas would be 11.5 %, but, together with Reebok, it can only reach a margin of 10.1 % (Handelsblatt 2006b). Secondly, for awhile now, Reebok has not meet the expectations of its consumers and, therefore, it has experienced declining sales in the U.S. market while brands like adidas, Nike and Puma have enjoyed increasing success (Handelsblatt 2006b). The combined market share of adidas and Reebok between 2003 and 2005 declined from 20.3 % to 17.5 %, while rival Nike augmented its market share from 36.8 % to 38.5 % (Kroder 2006). For these reasons, several critiques have been published in response to the acquisition of Reebok: A speaker from an association for the protection of shareholders judged the acquisition to be a risk for adidas and its shareholders (FTD 2006c). The shareholders are also concerned that the same mistakes, which were made during the Salomon deal, will be made in the Reebok acquisition (FTD 2006c). Even CEO Herbert Hainer admits that there are challenges to face within Reebok (FTD 2006c). An analyst from Sal. Oppenheim stated that he is sceptical, because he sees the step driven only by motives of regional expansion and, moreover, few synergies can be expected from the acquisition of Reebok (Handelsblatt 2005c).

Summary

To summarize the findings of this case study, it can be stated that adidas has learned its lessons from the Salomon deal. Several efforts can be identified in order to make things better during the integration process with Reebok. Here, it can be observed that the measures of influencing the integration process consist mainly of a transparent communication policy towards the employees and of the filling of several key positions at Reebok with adidas managers. Further, the particular approach of the integration teams encourages a broad perspective and appreciation of expertise from experienced managers. In the introduction, three problems associated with the integration process itself have been identified: fragmented views of involved specialists, increasing time pressure to close a deal and the inability of buyer and seller to resolve areas of ambiguity (Jemison/Sitkin 1986, p. 107). Due to the above mentioned measures, the first problem of

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fragmented views may not occur in the Reebok case. However, no incidents could be found concerning the solving of the other two problems. Apart from the good work of the PR department, there seems to be few concerns about the cultural integration and the fit of national cultures of the employees. This could become a problem, as examples of other U.S. acquisitions demonstrate. Further, the fit of the two companies has not been verified in a comprehensive way in the pre-merger period, as mostly market motives have been mentioned to be the main reasons for the acquisition. Adidas main objective of becoming the number one in the sporting goods market and to reach a high market share also in the U.S. market is pursued in a very consistent manner. The strong focus on hard business factors could also become a problem, as no efforts of cultural integration are made.

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