i. Evaluate reasons put forward for the merger transaction.

[ 9 marks]

Reasons for merger

1 Clearly the chances of competing against Nike were far better together than separately
(Competition)
2 well-defined and complementary
 brand identities,
 a wider range of products,
 and a stronger presence across teams, athletes, events and leagues

One of the reasons for mergers is to combine complimentary needs. In this case study Adidas
was perceived to have good quality products that offered comfort whereas Reebok was seen
as a stylish or hip brand. Thus Adidas and Reebok had to merge so as to stand a chance to
compete against Nike which had both attributes.

Reduced competition. It is often one benefit of merger activity – provided that it does not fall
foul of the competition authorities. In this case study, Adidas and Reebok were competing for
number two and three thus by merging competition against each other would have been
reduced and can now compete together against Nike

Why are most companies opting for merger and acquisitions instead of
organic growth? [6 marks]

Despite some advantages which organic growth may have, most companies are opting for
merger and acquisitions because

 M&A tends to be a faster way to grow since it will be merging or acquisition of an already
established business. In the case study, Adidas will not try to come up with innovation
sportswear since Reebok is already well versed in that area. Whereas organic growth tends to
be slow.
 Can open up new markets, geographies and industries. With Adidas struggling in US, it will
benefit from the merger with Reebok since it has 12.2% market share, which is a bit higher
than that of itself of 8.9%. With organic growth the organization will need
 Reduce costs through shared budgets and greater purchasing power: The Adidas-Reebok
merger had brought many cost cutting strategies to both the companies. With the merger, the
companies can share the common marketing strategies, manufacturing processes and
financial operations. The employee exchange will be the most advantageous program of the
 merger through the companies can share the employee expertise and thus there will be lesser
chance of hiring the new work force and reducing the costs.


i. Explain two reasons attributable to merger failures. [ 6 marks]

 The fit/lack of fit syndrome. There may be a good fit of products or services, but a serious
lack of fit in terms of management styles or corporate structure.

●  Lack of industrial or commercial fit. Failure can result from a horizontal or vertical
take- over where the acquired entity turns out not to have the product range or industrial
position that the acquirer anticipated. Usually in the case where a customer or supplier is
acquired, the acquirer knows a lot about the acquired entity; even so, there may be aspects of
the acquired entity’s operations which may cause unexpected problems for the acquirer, such
that, even in these cases, a prospective acquisition should be planned very carefully and not
be based solely on experience gained from a direct relationship with the acquired entity.

●  Lack of goal congruence. This may apply not only to the acquired entity but, more
dangerously, to the acquirer, whereby disputes over the treatment of the acquired entity might
well take away the benefits of an otherwise excellent acquisition.

●  ‘Cheap’ purchases. The ‘turn around’ costs of an acquisition purchased at what

seems to be a bargain price may well turn out to be a high multiple of that price. In these
situations, the amount of resources in terms of cash and management time could well also
dam- age the acquirer’s core business. In preparing a bid, a would-be acquirer should always
take into account the likely total cost of an acquisition, including the input of its own
resources, before deciding on making an offer or setting an offer price.

●  Paying too much. The fact that a high premium is paid for an acquisition does not
necessarily mean that it will fail. Failure would result only if the price paid is beyond that
which the acquirer considers acceptable to increase satisfactorily the long-term wealth of its
shareholders.

●  Failure to integrate effectively. An acquirer needs to have a workable and clear

plan of the extent to which the acquired company is to be integrated, and the amount of
autonomy to be granted. At best, the plan should be negotiated with the acquired entity’s
management and staff, but its essential requirements should be fairly but firmly carried out.
The plan must address such problems as differences in management styles, incompatibilities
in data information systems, and continued opposition to the acquisition by some of the
acquired entity’s staff. Failure to plan can – and often does – lead to failure of an acquisition,
as it leads to drift and demotivation, not only within the acquired entity but also within the
acquirer itself. Every aspect of a prospective acquisition, as it will affect the would-be
acquirer, should be weighed up before embarking on a bid. Problems of integration have a
much better chance of being resolved before bidding action is taken than they do after the
event, when many more complications can ensue. Even if a product fit is satisfactory, the
would-be acquirer should be satisfied that the aspects of its own operation affected by the bid
will be properly adaptable to the new activities. Running the rule carefully over one’s own
operations may yield vital information as to areas which may need adaptation before a bid
can be contemplated, and pro- vide vital clues to appropriate areas for search when a bid has
actually been launched. One factor of special importance is a clear assessment of the
flexibility of one’s own information systems.

●  Inability to manage change. Several of the above points stress the need for an
acquirer to plan effectively before and after an acquisition if failure is to be avoided. But this
in itself calls for the ability to accept change – perhaps even radical change – from
established routines and practices. Indeed, many acquisitions fail mainly because the acquirer
is unable – or unwilling – reasonably to adjust its own activities to help ensure a smooth
takeover. One such situation is where the acquired company has a demonstrably better data
information system than the acquirer, which it might be greatly in the acquirer’s interest to
adopt.

Prescribe measures that can be put in place to reduce merger failures.

[8 marks]

The most difficult part of the merger or acquisition is the integration of the acquired
company into the acquiring company. A horizontal merger or acquisition requires
a detailed planning for integration.

Integration plan: After the merger or acquisition, the acquiring company

should prepare a detailed strategic plan for integration based on its own and
the acquired company’s strengths and weaknesses. The plan should highlight
the objectives and the process of integration.

Communication: The integration plan should be communicated to all

employees. The management should also inform the employees about their
involvement in making the integration smooth and easy, and remove any
ambiguity and fears in the minds of the staff.

Authority and responsibility: The first step that the acquiring company
should take is to take all employees into confidence and decide the authority
and responsibility relationships. The detailed organizational structure can be
decided upon later on. This is essential to avoid any confusion and
indecisiveness.
Cultural integration: People management is the most critical step in
integration. A number of mergers and acquisitions fail because of the failure
of management to integrate people from two different organizations.
Management should focus the culture integration of the employees. A proper
understanding of the cultures of two organizations, clear communication and
training can help to bridge the cultural gaps.

Skill and competencies upgradation If there is difference in the skills and

competencies of employees of the merging companies, management should
prepare a plan for skill and competencies upgradation through training and
implement it immediately. To make an assessment of the gaps in the skills and
competencies, the acquiring company can conduct a survey of employees.