I.

Introduction
Mergers and acquisitions have developed to be a widespread occurrence in modern
era. Giorgio Armani Group, a prospect business of Adidas AG, is one of the leading fashion
and luxury goods groups in the world today. It designs, manufactures, distributes and
retails fashion and lifestyle products.
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II. Statement of the Problem

Due to declining pattern of the financial performance of Adidas AG, and to new
opportunities and threats that arise for rival firms in the industry, the company needs a
clear three-year strategic plan to compete effectively to its competitors. A strategy to take
into consideration is the alliance with Armani to create a special collection for the ultimate
activewear concept. Hence, Adidas AG is concerned if it would be wise for the company to
acquire The Armani Group, which is one of the leading fashion and luxury goods group in
the world.

III. Case Facts

1. Adidas AG Mission
Adidas AG is committed to being a global leader in the sporting group industry by
producing brands that are novel, fun, have a passion for athletics and active people
worldwide. We are committed to delivering industry leading financial results,
innovating the most advanced products, focusing on our consumers, and maintaining all
of this while being a good corporate citizen.

2. Adidas AG Main Divisions

Adidas
Among the three divisions, it was the one with the best performance in terms
income earned. It is committed to providing the most technological and advanced
sportswear. It produces an assortment of products for tennis, running, basketball,
football, and other sports. It has two primary divisions: Sports Performance Division
which focuses mostly on athletes and Sport Style Division which is targeted at the youth
and fashion minded people.

Reebok
It was rooted on womens sports and fitness by it already expanded into mens
fitness. Its vision is: fulfilling and leading through creativity. And its purpose is, being
committed to corporate responsibility and enabling the youth around the world to fulfill
their potential through producing great and innovative products and through Reeboks
 Human Rights Program that aids underprivileged youth around the world meet their
potential and maintain an active and healthy lifestyle.

TaylorMade
It is the world leader in metalwood suppliers. Its focus is golf products such as golf
gloves, hats, shoes, balls and other apparel. It became the second in the golf industry in
2006.
3. Financial Information
Adidas AG derives its revenues 45% on footwear, another 45% on apparel, and
the remaining 10% on hardware. In the year 2008 to 2009, it derived more income in
Asia than North America. There is also large portion of goodwill in its assets and large of
long term debt in its total liabilities which is bad in the future if their revenues will
continue to decline.

4. External Issues
The global economy has a great impact on companies because they derive their
revenues from the public and if the economy is bad, people will tend to lessen their
consumption especially of luxury goods which are not needed in daily life. These
economic issues include currency rates, consumer discretionary spending,
unemployment rates, tax rates, restricted credit and much more.

According to the survey, most of the retail industry will continue to suffer from reduced
sales in the continuing years except those on the industry of sports and exercise-based
apparel, consumer electronics, prepared foods, shoes and accessories, and green foods.
But despite of this good forecast for apparel-based industries, apparel expenditures
among the U.S. customers will still somewhat decrease. Footwears also are expected to
outperform for the coming years but like the apparels, they also declined.

Companies are expected to offer more value priced clothing and products to entice
thrifty consumers to purchase.

Adidas AG continued to suffer from declined in revenues and profits as reported in the
3rd quarter of 2009. Adidas Group needs a clear three year strategic plan to compete
effectively against its competitors.

Armani announced that it will be joining forces with Reeboks innovation and
technologies to result in the ultimate activewear concept.
III. Areas of Consideration
1. Competitors
Competition is very rampant in sports clothing, sports equipment and footwear
market. With the onset increase in the number of competitors that Adidas AG has, its
struggle for the number one spot is undeniable. Adidas AG should be knowledgeable
enough with regards to the new products, strategies and promotions that its
competitors have. Some of the tight competitors that Adidas AG has are Nike, Under
Armour, Callaway Golf and the fast emerging Li Ning. With every decision that it makes,
it should consider well if that decision can help the company beat its competitors not
only on the short term basis but most importantly in gaining long term benefits. If
Adidas AG is to acquire the Armani Group then it can diversify and expand its existing
product line by incorporating a touch of luxury with durability and style.

2. Global Economy
Most of the corporation today is facing challenges in the issue of the state of the
global economy. This includes currency rates, change in the buying pattern of the
customers that is caused by their more stringent budgeting of their hard earned money,
unemployment rates, provisions on taxes and other economic issues. This issue can be
viewed as unfavorable in some ways with the proposed acquisition of Adidas AG of the
Armani Group. The Armani Group being distinguished as the leading fashion and luxury
goods group in the world can even set the price of Adidas AG products higher which can
eventually decrease its marketability with the middle class and isolating it to the upper
class.

3. Shift in Customers Buying Pattern and Behavior

Since the cost of living in almost all of the places in the world increased
significantly, customers put considerable amount in their spending. They want to make
sure that they can get more than what they pay for. They are more stringent in terms of
spending their hard earned money. In terms of buying commodities, they make sure
that the price, durability and functionality of their chosen product is well considered.
Customers are now wiser in terms of choosing the products that are within their
standards.

4. Financial Condition of the Acquirer and Acquiree

Adidas AG must consider its financial condition in making its decision whether to
acquire Armani Group or not. A look at its financial position shows that it has extensive
long terms debts and high goodwill. This can make the company in trouble in the years
to come. Its financial position also shows that its accounts payable increased
 significantly from 2007-2009, this means that a substantial portion of its assets must be
set aside to pay these currently maturing obligations. In effect, the acquisition of Armani
Group may in some ways affect the financial resources that Adidas AG has. Although the
terms of the acquisition are not stated, it still will have a great impact on the financial
condition of Adidas AG not only in the short run but also in the years to come. Knowing
the financial condition of the acquirer is not enough in ensuring a sound decision. The
company should also consider the financial health and capability of the company it
would wish to acquire. It should make sure that the acquisition would not result in an
unprofitable venture and wastage in the time, effort and resources of the company.
Since Armani Group is the leading fashion and luxury goods group in the world, then
even without looking at its financial statements would lead to the belief that it is
profitable and is in good financial condition and is operating efficiently and effectively.
Its number of employees amounting to 5000 individuals and its 13 factories worldwide
would indicate its good financial condition. But these will not relieve the Adidas AG from
having an in depth evaluation before making an investment decision of acquiring The
Armani Group.

5. Line of Business and Congruence in Organizational Structure, Environment and Policies

For any teams or groups to operate in synergy, its vision and mission, policies,
corporate environment and structure should be in lined with each other. In effect, a
company should only acquire business enterprises with same or related vision and
mission. The company should also consider the target market and the line of business
that the company they wish to acquire has. The line of business of the acquirer and
acquiree should not be contradicting so that they can develop their product in such a
way that it facilitates the improvement and development of a product so that it may
possess the best of the companies. Same target market is also important because it
dictates how price, product specifications, marketing techniques and overall strategy in
increasing the salability of the product should be. The company should also reconcile its
corporate environment, policies and structure with the acquired company; it should
correct or consider the difference in the corporate structure and policies between itself
and the acquired company. With those considerations, the company can establish a
unified and firm organization.

6. Comparing Projected Cash Flows with the Cost of Acquisition

The company should obtain reliable projected cash flows of Armani Group to
compare with the cost of acquiring the company. It will analyze if benefit will exceed the
costs, which is mainly the purpose of the acquisition to improve the financial
performance of Adidas AG and to be a threat competitor to rival firms in the industry.
 7. Forecast of the Products that will Outperform and the Products that will be Left Behind
According to S& P Industry Surveys, most of the retail industry will continue to
suffer reduced sales over the coming years, but a few will outperform the otherwise
lackluster forecast. Sports and exercise- based apparel, consumer electronics, prepared
foods, shoes and accessories and green goods are said to be the products that will
outperform. Although there is a good forecast related with apparel based items, their
revenue had still dropped in the first quarters of 2008 and 2009. With regards to the
forecast that sports based apparel will outperform, Adidas AG should focus on
developing its sports based apparel and create new products that will capture almost all
markets.

IV. Getting Into Areas of Consideration

There are several areas to take into consideration if it would be wise for Adidas AG to
acquire The Armani Group. This is part of its strategic plan to compete effectively to its
rival firms in the industry. The following are some ways to dig into details regarding the
areas needed to be considered:

1. Analyze the segments that are generating more revenues and those that are not
profitable.
The company should analyze the profitability of each division, so that they can
have a clear picture of the profitable and not so profitable divisions. In that way they
can adjust their strategies and management styles to fit the needs of their company.
Also if the analysis shows that one segment is incurring losses then it should consider
dropping that segment if it will benefit the company in general.

Despite the difficulty of determining the divisions profitability, the efforts will be
fairly rewarded. Through the use of obtained outputs, the companys resources can be
maximized by focusing on the divisions that will produce greater benefits to the
company. The company can focus its time and resources in the division that can give a
greater return to the company and can prevent waste of effort, energy and resources in
trying to improve an unpromising division.

2. Respond to the trends and forecast.

Responding to the trends and forecast means that the company should consider
developing their product lines that will fit the demands of the consumers. They should
produce more of the items that will be in demand and produce lesser of the products
that are lackluster. In such ways the company can prevent shortage as well as surplus.
 Also, the company will be able to get the attention of the customers because of new
and improved products that they will launch. Increase in sales will result since they can
cater to the changing needs of the customers.

3. Do a benchmarking of the best practices and marketing style in the industry.

No matter how talented and skilled the management is, there is always something
that has to be improved. With the help of benchmarking, the company can learn about
its own strong points and weaknesses. It can adapt to the industrys most effective
strategies and get rid of the things that hinder the companys growth. As a result, the
company will be able to catch up with the competition in the market because it will
become aware of what other companies in the industry are doing, and the strategies of
the company will be closer to the standards or the industry norms.
4. Make a forecast of the financial position and performance of the company if it is to
acquire The Armani Group.
The company must have identifiable and concrete goals in its acquisition of the
said company. It must have a clear plan before, during and after the acquisition and
must have a strong control to make sure that the companys activities are directed
towards the correct path. Consequently, the company will be able to assess if the
Armani Group will be a worth the investment.

IV. Alternative Courses of Action

1. ADIDAS AG SHOULD PURSUE THE ACQUISITION OF THE ARMANI GROUP.

Advantages
a) Expansion - Adidas will have a wider range of products. With new types of items
being made available to the customers, the company will then have increased sales.
b) (beb di ko alam anu yung term) After acquisition, Adidas will have more assets
because of the purchase or investment that took place. With this, the value of
Adidas will also rise.
c) Excellent marketing strategy
d) Increase average shoe price
e) Encourage a strong brand push
f) Draw attention toward new style, sport and technological developments
g) More products for different customers
h) Increase in product line
i) Reduction in costs
j) Decreased competition
k) Enter to new market/Segments
 Disadvantages
a) Risky The acquisition will be very uncertain. There is no assurance that Adidas will
have a return on its investment and be earning more profit. There is a possibility
that it will just incur losses.
b) Costly Adidas would need to invest so it will be using a lot of its assets to pay for
the acquisition. Because of this, its own operations might be affected because of the
sudden decrease in assets.
c) Change in Organizational Structure When a certain company acquires another
company, chaos might arise because some employees would be confused of to
whom they will report. After the acquisition, the organizational structure of both
companies might be a problem.
d) Incompatible Company Policies Since the two companies cater to different
markets, the policies they have set for their own might not be related or aligned. It
can create conflict because the management will not be able to identify which
particular policy from the two companies must be followed.
e) Items may not be saleable Since Armani Group offers luxury items and Adidas
offers items almost for everyone, Adidas might not be able to sell such expensive
items.
f) Upper priced markets are more covered.

2. ADIDAS AG SHOULD NOT PURSUE THE ACQUISITION OF THE ARMANI GROUP.

Advantages
a) Focus on its own products Adidas will just focus its attention on its existing
products and just improve them to catch up with changes in trend and it can also
develop new products.
b) Departure from high-risk acquisition Due to recession experienced by the global
economy, acquiring The Armani Group will be risky for the company. The company is
not in good financial position to enter into high-risk investments since its
performance trend is declining. It would therefore be safe for Adidas to continue its
own business with its own line of products.
c) Conflict of interest will be avoided The managers of Adidas will just focus on
enhancing the performance of their own company.

Disadvantages
 a) Stagnant The company will not be able to expand in terms of acquiring other
companies. Its growth will be stagnant. It will just offer the same set of products and
the customers might get bored with certain product lines.
b) No other ways to earn If its own operations from Adidas will result to losses, the
company wont be able to earn a profit because it has no other source of income.

V. Recommendation

The group strongly suggests the implementation of the first alternative course of
action. It is highly recommended that Adidas AG should not pursue the acquisition of The
Armani Group.

Since any corporation faces the state of global economy, it is not advisable for any
corporation to enter into high-risk investments. Based on the reported statements, the
company has experienced a declining financial performance trend, thus, acquiring a
company in time of global recession may just contribute to losses incurred by the
company. Although the alliance may create a special collection combining active style with
sport and technology, still, anticipation of customers buying patterns is hardly identifiable.
Moreover, according to surveys, most of the retail industry will continue to suffer reduced
sales over the coming years. This simply exemplifies that the prospect alliance with an
ultimate activewear concept that is expected to trend may fail, considering the present
state of global economy and validity of the forecasted results.

Instead of expanding the business through alliance with The Armani Group, Adidas
AG may just improve its own line of products to compete with the rival firms of the
industry. It may create new trendy products that will give satisfaction to customers
preference. It may also increase its marketing strategy to gain customer loyalty, which is a
sustainable competitive advantage for the company. Aside from that, there will be no
changes on the organizational environment and culture. In which, such changes may result
to conflicts among employees and managers that will massively effect the workplace as
well as the operations.