Reebok, adidas have plenty of issues to solve

Updated: August 3, 2005, 5:45 PM ET
By Darren Rovell | ESPN.com

The news hit late Tuesday night with the blockbuster headline: Adidas To Buy Reebok.

Like most major mergers, it seemed too big to be real. Wendy's doesn't usually buy Burger King. Hilton doesn't buy Marriott.

But these deals do happen, often when top officials with one behemoth realize that that their goals will be best accomplished by joining instead of competing. Mergers have reordered the rank of companies in the energy and telecommunications businesses in recent years. Sports is no exception: In July 2003, Nike bought Converse for $200 million, and in April 2004, Reebok bought The Hockey Company for roughly the same price.

But never something like this -- two of the world's largest footwear and apparel companies teaming up to create a company that grossed $11.1 billion in revenues last fiscal year.

For lovers of the Reebok brand, word out of Germany is that the Reebok vector isn't going to disappear any time soon. They'll essentially operate as two separate brands under adidas' watch, which means that Reebok logos will still appear on NFL jerseys (as part of the company's exclusive apparel deal with the league) and Reebok pumps won't have to wait for the shoes to be refitted with the three stripes.

So why would adidas do this?

Although the brand was doing well in Europe (adidas controls 35 percent of the world's soccer cleat market), it wasn't making any progress in North America. Last year, adidas had a 9 percent share of the $9 billion U.S. athletic shoe market, compared to Reebok's 12 percent and Nike's 36 percent. Adidas had an 11 percent share of the U.S. shoe market in 2001, but the brand was never able to eclipse that mark.

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On the surface, the deal appears to be very favorable for Reebok, with adidas agreeing to pay $59 per share, a 34.2 percent premium over Tuesday's closing price. But the legacy of Reebok chairman and CEO Paul Fireman, who will still be at the helm of the Reebok brand, will partly be in the hands of his company's German acquirer. If adidas destroys the Reebok brand, the 61-year-old Fireman -- who reportedly put in an initial investment of $35,000 in 1979 -- still will make hundreds of millions when the deal closes in the next six to nine months, but the move will tarnish how people perceive him.

As a result of the alliance, adidas will automatically double its share in the United States, but in order for the deal to work out financially -- as with any merger, the company will have to effectively consolidate, or as Adidas chairman and CEO Herbert Hainer says, investing in both brands is "what is necessary to drive them forward."

Adidas officials are expected to embrace Reebok's sports and entertainment strategy, with the recent signings of 50 Cent, Jay-Z and Nelly. Adidas has dabbled by signing Missy Elliott, but Reebok has made a greater commitment in recent years in letting entertainers sell their shoes and apparel.

"They have brought a new kind of business to the table -- the fusion of sport and lifestyle and music," Hainer said. "I would say they have done it better than we in the U.S. market."

Adidas will also benefit greatly from using Reebok endorser Yao Ming to further capitalize on its business in China. Unlike Reebok, which was just beginning to develop the expensive infrastructure in China so that Yao's value could be realized across the country, adidas has been in the marketplace for 20 years. Now it will have China's most valuable spokesperson at the most important time. Hainer said that with the 2008 Olympics in Beijing, he's convinced that Asia, and China in particular, will be the industry's growing force.

Other issues will be figured out during the course of the next year or so.

How will the company streamline funds devoted to the battling each other on the grassroots basketball front? Since the company is keeping the brands separate, it might spend the same money to sign high-profile high schools and AAU teams. Adidas is king in overseas grassroots marketing, while Reebok -- with the addition of Sonny Vaccaro -- just started ramping up its force in the United States.

How much patience will adidas have with the development of Reebok's newly acquired hockey brands? Reebok made its investment in hockey before the yearlong NHL work stoppage. It costs a lot of money to make a new brand relevant in the mind of consumers -- Nike has owned Bauer for more than a decade -- and returns might be even lower than anticipated given that the absence of the sport in the United States, even with phenom Sidney Crosby as an endorser.

What priority will adidas give to league and team deals as opposed to individual endorsers? Adidas made its name in Europe by signing the big soccer clubs -- Chelsea (beginning in 2006), Bayern Munich, Real Madrid and AC Milan. Reebok has deals with the NFL and the NBA. Growth of the company will depend on defining a clear strategy in terms of what works and what doesn't. What's worth more? Using David Beckham or maximizing the sponsorship with Real Madrid? Do adidas officials, who are used to the cluttered advertising on the soccer shirt, feel they need to push to allow the NBA to put the Reebok vector on the jerseys, a condition that was not included in the deal when Reebok negotiated it?

In the past 25 years, adidas, Nike and Reebok have all taken turns as the top footwear brand in the United States. Nike surpassed market leader adidas in 1980 and, thanks to the fitness craze and the growth of catering to female athletes, Reebok took the top spot from Nike for a brief time in 1987.

Reebok's current campaign has the tagline, "I Am What I Am." That's not the case anymore for Reebok. They are still Reebok, but they are now part of the adidas family. Can the two powers one day unsettle the Swoosh, which has reigned for nearly two decades? That now becomes the most important question in the sports business.

Said Hainer: "We want to grow both brands together faster than the individual brands and, of course, grow faster than our competitors and then we will finally close the last piece of the gap."

Darren Rovell, who covers sports business for ESPN.com, can be reached at Darren.rovell@espn3.com.

Darren Rovell | email

ESPN.com Sports Business reporter

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