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Adidas buy of Reebok would boost U.S. market share

8/3/2005

FRANKFURT, Germany -- By combining Adidas' popularity in
Europe among soccer and athletics fans with Reebok's appeal to U.S. fans of basketball and football, the architects of the $3.8 billion sportswear and athletic gear deal hope to create a more muscular rival to world leader Nike.

Adidas-Salomon AG said Wednesday it has agreed to buy Reebok International Ltd. for $59 a share that combines two major brands with links to both athletics and lifestyle. That was a healthy 34 percent premium over Reebok's closing price Tuesday.

While Nike Inc. still has the clout to stay on top, it will face a fiercer challenge from a company that will combine their strengths to grab more market share and gain access to bigger markets.

"Adidas-Reebok will make inroads against Nike by presenting a stronger fashion brand, which will also gain wider support and
endorsement deals," said Faith Hope Consolo of Prudential Douglas
Elliman. "When they present this united brand, they will have the
luster to get more endorsements from high-profile athletes."

"Separately they had a very small niche, but together Adidas
and Reebok will have a global presence to compete one-on-one with
Nike," she said.

At the same time, neither company is forfeiting their own
brands. Adidas Chairman and CEO Herbert Hainer said the brands
would stay separate but complement each other -- a move that is
likely to help them in their competition with Nike.

German-based Adidas has its roots in soccer and track and field, while Reebok's line of sneakers and athletic gear is visible across American sports like football, baseball and basketball.

Combining the two, executives said, will mean more access to athletic events just about anywhere there is a stadium.

"This portfolio will present us in all the major sport
categories around the world. Reebok is extremely strong in the
American sports like NFL, NBA -- and Adidas is very strong in the
FIFA world cup, the Olympic Games and the European Champions
League," Hainer said.

"Two brands individually will add to the value," said Chairman
and CEO Paul Fireman of Reebok, which is based in Canton, Mass.

But two brands does not guarantee first place, warned Patrick A.
Gaughan, president of the New York-based Economatrix Research
Associates Inc.

"One factor which seems to play an important role in market
success is being of a critical size and being in the No. 1 or No. 2
market share slots. It is very tough to compete with a dominant
firm when you have a market share much smaller than it," he said.
"I think this is the case for both Reebok and Adidas -- especially
in the lucrative U.S. market."

Nike's annual sales are approximately $14 billion worldwide.
Adidas has about $8 billion in annual sales while Reebok has nearly
$4 billion.

"This is really exciting; it is the first time in that Adidas
really has a shot to seriously challenge Nike, which is weak right
now from management problems," said Erich Joachimsthaler, CEO of
marketing strategy company Vivaldi Partners.

But Adidas must be prepared to handle the larger team of brands,
said Joachimsthaler, who worked with Adidas in the early 1990s as a
consultant.

"Adidas' focus is technology and performance development, where
Reebok is purely sales driven," he said. "The will also have to
deal with uniting two companies with almost polar opposite business
cultures."

Adidas, turning from a sports shoe company into a
lifestyle/entertainment company, must also be careful not to lose
its loyal athletes, he said -- "there is a fine line between
fashion and sportswear."

Reebok has endorsement deals with NBA players Allen Iverson and Yao Ming, said Gaughan, and Adidas has strengths in more international sports like soccer -- including David Beckham and the
team Real Madrid.

While Nike, based in Beaverton, Ore., has endorsement deals with
young basketball stars like Carmelo Anthony and LeBron James,
Gaughan said, "neither is a Michael Jordan, and the NBA is not
what it once was when it had Jordan, [Larry] Bird and Magic
Johnson."

Investors cheered the deal. Reebok shares rose $13, or 29.6
percent, to $56.95 in late trading on the New York Stock Exchange,
while investors pushed Adidas up 7 percent to 158.20 euros
($192.96) in Frankfurt. Nike shares gained 93 cents to $86.76 on
the NYSE.

Gavin Finlayson, an analyst with Commerzbank, said the teaming
would give the combined company more muscle in the retail market.

"Adidas, in conjunction with Reebok, has the potential to say,
'We want better terms or conditions or we'll take our business
elsewhere,"' Finlayson said.

Consolo said it would also give the companies more reach into
different stores.

"Adidas and Reebok will absolutely be able to compete on both a
specialty store and department store basis. This will increase not
only their market share, but their allocated space within
department stores," she said.

The deal is subject to regulatory approval in the United States
and Europe as well as by shareholders. The companies said the
transaction could close during the first half of 2006.

Adidas said it did not expect any significant reductions in the
work forces of both companies. Chief Financial Officer Robin
Stalker said the deal would likely lead to little if any
significant restructuring costs.

The deal came as Adidas posted a 30 percent profit gain to 67
million euros ($81.7 million) in the quarter ended June 30, up from
45 million euros a year earlier. Sales rose to 1.52 billion euros
($1.85 billion) from 1.4 billion euros.