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Nike finally faces real foe
The athletic shoe maker as dominated for so long that its investors may feel invulnerable. But the combined Adidas/Reebok could creep up on it.
By Robert Walberg
Nike (NKE, news, msgs) shareholders apparently aren't quaking in their comfy $100-plus Shox athletic shoes over Wednesday's announcement that Adidas-Salomon is buying Reebok International (RBK, news, msgs) for $3.8 billion. In fact, Nike's stock climbed 1.3% on almost two times the three-month average daily volume of 1.6 million shares.
This gain might confuse some observers until they understand that it is confusion itself that prompted the run. And they also might realize that Nike's stock could suffer over the long haul.
Let me explain. Though the combination of Adidas and Reebok makes for a potentially more dangerous competitor in the long run, investors are betting that over the short run these two divergent corporate cultures will have a hard time effecting a harmonious and productive merger.
And that might well be true because Germany's Adidas is seen as a more traditionally run outfit that focuses on technology and performance, while Canton, Mass.'s Reebok is driven more by marketing and sales. There are also the obvious geographic differences that can create difficulties. However, these are the very reasons that this deal makes so much sense in the first place and why investors in Nike might want to rethink their cavalier attitude to the deal.
Be like Mike
Nike's arrogance is understandable. For the better part of two decades the company has dominated the athletic shoe market, especially here in the U.S, where high-profile endorsement deals with Michael Jordan, LeBron James and Tiger Woods have given the company a definite edge with consumers. According to the Sporting Goods Manufacturers Association International, Nike's share of the U.S. athletic footwear market stands at 36%, triple Reebok's and quadruple Adidas'. Given that the U.S. marketplace accounts for roughly half of all dollars spent on athletic footwear, Nike's advantage has been huge.
But you don't have to be a math wizard to see that the combined force of Adidas and Reebok will give the new company more than a 20% share, making it a much more real threat to Nike over the long haul. This is especially true given that Adidas/Reebok's expanded product offerings and global reach increases its leverage with retailers.
Internationally, Adidas and Nike were pretty even in terms of market share, but with the addition of Reebok and its niche in popular sports such as basketball and baseball, Nike could feel some pressure on this front.
Learning from each other
If Adidas can learn from Reebok the importance of effective marketing and licensing deals here in the U.S., and Reebok can take some of the technical superiority associated with Adidas and incorporate it into its shoes, the two brands will only improve over time. An Adidas/Reebok combination isn't going to dethrone Nike overnight, but it at least puts those companies on a much more level playing field.
It might take several months for the corporate cultures to merge; that's always a risk to any big deal, especially one involving companies headquartered in different countries. But the bigger risk for Adidas and Reebok was to stand by and continue to be steamrolled by Nike. Ironically, by deciding to "just do it" and merge, Adidas and Reebok might just stick it to Nike in the end.
For Nike shareholders there's just no way to think that the proposed merger between its two biggest competitors is a good thing. Consequently, Wednesday's modest gain should be seen as an opportunity to reduce exposure to the stock. The risks of being long Nike just went up enough to prevent any meaningful multiple expansion from current levels.
At the time of publication, Robert Walberg neither owned nor controlled shares in any equities mentioned in this column.
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