Tuesday, August 09, 2005

Intangible Adidas

So should Nike be running scared now that Adidas has bought Reebok for $3.8 billion in cash? I’m not at all sure. Yes, the new combined $12 billion Adidas-Reebok (“AR” until I know the name of the new company) will have more clout with suppliers (for squeezing lower prices) and with retailers (for better shelf space). Yes, the new AR will lop off $120 million in duplicate costs over the next 3 years. And yes, it’ll combine the global Adidas presence with the U.S. Reebok base. And yes again, the new $12 billion AR will approach the $14 billion Nike in revenues, though it will lag significantly in the important metrics like net income and market cap, the former reflecting profitability and the latter reflecting the market’s appraisal of future earnings.

So to summarize, in terms of tangible assets like size, mass, volume, reach and scale, the new AR is big, big big. But here’s the more important question: How will this merger affect the company’s intangible assets?

Here’s a little lesson for you merger lovers: In today’s marketplace, intangibles trump tangibles. If you want to predict which runner will win a race, do you look for the bulkiest or do you look for the fastest? I’d know where I’d place my bet. Likewise, if you’re going to invest in a company, you’d be wise to tap a company loaded with intangibles like:

• Knowledge: intellectual property, great ideas in the pipeline, cutting edge science and technology, great data bases.
• Talent: top-notch people and the ability to attract and retain the best and brightest of them, and the capacity to attract the partners who are world-class in breakthrough knowledge and innovation.
• Imagination: the organization’s ability to leapfrog over conventional wisdom with creativity and innovation, and to quickly translate that ability into very cool products.
• Speed and agility: the capacity to react, make decisions, spread information, do follow-up, and go to market before any competitor.
• Foresight: the capacity to look ahead, peek around corners, and quickly capitalize on fleeting opportunities.
• Renegade desire: the company-wide hunger to set the agenda of the industry, to set the rules of the game .
• Inspiring Leadership: leaders who can combine bold vision with operational excellence, who can inspire and mobilize their teams to strive for extraordinary goals.

Don’t be surprised that the Brookings Institute’s research has concluded that 80% of the value of the S & P 500 can be attributed to intangible factors. That means it’s intangibles that generate real growth and corporate health.

So the important question for the new AR, especially in the fickle, fashionized world of sports gear, is whether this merger will jack up the new intangibles to a level higher than that of the new tangibles. In other words, will this new company be faster, hungrier, more agile, more innovative, more talented, and more forward looking, than it was before the merger? Will there be more (intangible) breakthroughs like Adidas’ hot-selling $250 chip-embedded “intelligent shoe” as a result of this merger, or will there mainly be more scalable advertising dollars spent for existing lines?

If you answer “both!”, I wonder if you’re being naïve. As companies get bigger and more complex, especially after merger that suddenly hyper-inflates the size of the company, “dis-economies” often enter the picture: more hassles and costs in integrating the companies, more bureaucracy, more risk-aversion, slower response-time, more desire for quick cost-cuts and quicker revenues to justify the costs of the merger, more jockeying for political power, more corporate controls on so-called “messy” innovations. That’s why the scorecard on mergers is pretty miserable; more than 50% are financial disappointments.

I’m not saying that the new AR won’t be successful. I’m simply saying that I’m not impressed when newspaper reporters breathlessly hype up the value of sheer size. If I were Nike, I’d be more worried about a siege of rocket-growth $180 million companies like AND1, which has captured the urban basketball shoe market with a mix of hip-hop music and streetball tours that are so unbelievable that they’re now part of ESPN. At the end of the day, remember that whether you’re Adidas-Reebok, Nike, or AND1, consumers have a ton of choices about their shoes and clothing, and they’ll exercise those choices regardless of boardroom decisions that are too often based on tangible assets.

1 Comments:

Anonymous Anonymous said...

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3:20 AM  

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