For years, adidas and Reebok
Yesterday marked a turning point in their strategies as adidas made a $59-per-share bid to buy Reebok. That's a 34% premium to Tuesday's closing price and a 56% premium to the Motley Fool Stock Advisor recommendation price. Although Reebok's board gave its approval, shareholders will still need to vote on it.
Nike and adidas are arch enemies of old. In fact, one of Nike's goals early on was to destroy adidas. So this merger is all about taking Nike down a peg by exerting more power over retailers like Foot Locker
Combined, the new company will have $11.1 billion in worldwide sales, with 35% or $3.9 billion of those in North America, compared to $13.7 billion for Nike, with 37% or $5.1 billion in North America. While the press release talked about the battle in North America, this is clearly a bid for world domination.
So how will the new combined company be able to influence retailers? By offering a larger and stronger set of products. It's a question of show and scale -- the stronger your brand and the bigger you are, the more shelf space you can demand with better prices.
Analysts were split on whether they liked the deal or not. And, although it pains me to say this, I agree with them. From a strategic standpoint, I totally get it. A larger company will be more competitive than two smaller ones, especially since its combined U.S. revenues will be just 25% less than Nike's. But the execution is what I worry about. Will the brands be managed under one VP or two? Will there be any synergies from product design or advertising? I think it will be crucial to manage the brands separately but present a unified offering to the retailers. That's easy to say, but can be hard to do.
Did adidas pay too much? It's hard to quantify the value of gaining power that can help level a competitive playing field. Time will tell. But with Nike's stock up after the announcement and Reebok shares only trading at $57.15, perhaps adidas is paying a bit too much. Still, I'm sure our Stock Advisor subscribers don't mind the added 34%.
David Meier owns shares of Nike but does not own shares in any of the other companies mentioned. The Fool has a disclosure policy.
