The Joint Venture of NIKE and Adidas - Research Paper Example

Introduction A Joint venture is considered as an effort to form an entity, jointly together by any two entities, to undertake any economic activity for lawful purposes. Forming joint ventures is therefore one of the most prominent methods of entering into new markets as it provides an opportunity to tap into the local knowledge as well as skills to make a successful entry. Legally, a joint venture is a partnership which takes place for the short period of time by more than one party for any mutually beneficial purposes. As a general rule, each party to the joint venture contribute its assets towards the formation of the joint venture and also at the same time share the risks involved in forming such partnership. One of the benefits of forming a joint venture therefore is to gain access to the new markets as two entities; one foreign and one domestic and as such foreign entity often bring in new technologies which can benefit the domestic entities due to technology transfer. In US, Joint ventures are mostly regulated by Partnership laws, Contract Act as well as commercial transaction laws. In order to successfully formulate a joint venture, it is really important to consider due diligence, business plan as well as the allocation of the income must be decided before formation of the joint venture contract. This report will present an analysis of the joint venture between NIKE and Adidas, the business potential and the international aspects of NIKE as well as performing a due diligence of the potential joint venture between the two. Identification of Parties This report will present a legal due diligence of NIKE and Adidas joint venture and as such will provide some insight into some of the issues which may be faced by NIKE. A brief review of the form K-10 of NIKE would suggest following: 1. Nike own and operate various retail stores, ecommerce, independent distributors as well as franchisers across the United States and World. Nike has one of the unique business models in place where it manufactures its products through its contract centers located across the world. This provides NIKE necessary cost advantage over its competitors. 2. Nike manufactures and sells branded footwear, apparel as well as equipment and different accessories. This range includes various brands offered across the world either supplied locally or through franchising. 3. Make its supply chain more competitive as well as efficient through strong operational discipline. NIKE’s supply chain is truly a global supply chain due to the fact that it involves different stakeholders at different points in the supply chain. Besides, these stakeholders are spread across the world. 4. Achieving strong cost advantage through adoptive lean manufacturing philosophy. NIKE has adapted a very unique manufacturing philosophy as without directly owing any manufacturing site, it has developed relationships with its suppliers to offer high quality NIKE products. 5. Involvement into major international sports events to achieve promotional exposure to other markets. 6. Changes in foreign currency exchange rate contributed significantly to the revenue of the firm. This indicates that the firm has significant exposure in international currencies i.e. most of the suppliers of NIKE are located at different locations in the world and as such NIKE has to pay them in international currency to settle its payments. 7. NIKE recorded revenue of $18.627Billion in year 2008 with total net income of $1.883 Billion. The total revenue growth is 14.01% as compared to year 2007. This increase in the profitability as well as revenue growth indicates strong brand image of the product in world market. Since this joint venture is to be formed between NIKE and Adidas therefore brief strategic review of Adidas shall provide a great insight: 1. Adidas is a German group and a direct rival of Nike. Adidas manufactures various sportswear products. 2. Adidas’s strategic goals and objectives include producing quality footwear products and are an industry leader in this market. 3. Adidas products are diverse as against the Nike’s because it has diversified itself into different sportswear i.e. football, cricket etc. 4. Performance is the core value of the Adidas Group. The overall strategy of the group is to provide athletes best possible sports equipment to improve their performance. This therefore also indicates that the Group is focused towards achieving a level of performance which exceeds the expectations of the consumers. 5. Group is also focused on leveraging opportunities across its portfolio. The Group has the strategy to either penetrate its existing markets or develop new markets. This strategy allows Adidas to focus on its existing markets as well as look for capitalizing new opportunities. 6. Adidas also aims to be world’s leader in the regions where the firm competes. It is because of this reason that it holds dominant position in various markets including Asia where it is number one in terms of selling the total number of units. 7. Adidas is also planning to customize its distribution as against the conventional methods. This strategy provides Adidas more flexibility as well as breadth to tap different strategic alternatives. 8. Adidas’s net sales during 2008 were 10.799 Billion Euros which is 4.85% higher as compared to year 2007. The net income of the firm is 642 million Euros which is 5.9% of its sales. 9. Adidas can be a great fit for the NIKE because both the companies are offering similar products and as such may find it easier to create synergy between each other. Secondly, Adidas has traditional dominance in some markets where NIKE has not been able to penetrate successfully. A joint venture with Adidas will therefore provide an opportunity to the firm to tap into new markets. Due Diligence Legal due diligence is considered as an essential parts where two companies under to formulate joint ventures or take other similar moves such as mergers and acquisitions. A good legal due diligence would consist of a scrutiny of the either all or the specific issues of the target company with a view to undertake an objective assessment to uncover any potential legal risk which the buyer may face. The basic aim is therefore to check whether the company is facing any legal problems currently and what risks these legal problems may create for the potential buyer or partner of the firm. The following section of this report will discuss the process adopted in performing the due diligence: 1. This due diligence report will collect and gather the information regarding the target company in a bid to unearth any legal problems which can create potential problems for the NIKE. 2. To present and outline different issues which can be implemented in order to reduce the risk. This is critical because initially indicating potential areas of discomfort would provide NIKE a better opportunity to prepare itself against any future challenges. 3. To clearly identify the different areas where further improvements can be made. 4. To identify the different strong and weaker areas of the target company so that a proactive measurements can be taken to avoid future losses. In order to perform this due diligence, we will be scrutinizing following documents: 1. Financial Documents i.e. while reviewing these documents, we concentrated on sniffing through the information presented in the various reviews and reports given by the management as well as the details given in the various notes to the accounts. 2. Key Contracts: the key contracts which the firm has entered with the various stakeholders including labor unions, mergers and acquisition etc. 3. Corporate charter and by-laws of the firm. The bye-laws and corporate charter would provide an insight into the legal activities of the firm and what are some of the rights and obligations of the firm against its various stakeholders. This would also provide a great insight into how the firm can actually prepare its defence in the wake of any litigations etc. 4. Litigation data The above documents are taken into consideration however; following documents could not have been reviewed: 1. Minutes of the key meetings of board of directors and shareholders. 2. Material information furnished to shareholders and members of the board. 3. Sample copies of different permissions received from stock exchanges for listing as well as transfer of shares. 4. The information regarding the stockholders, the percentage shareholding of the various classes of shareholders as well as the respective dates of issuance and transfer if any. 5. Details of any stock options and other derivative transactions. 6. The power of attorney given on different matters either to one person or different persons. This also includes the competent authorities who have given such power of attorney and under what conditions. 7. The exact details of any convertible debt instruments and underlying covenants which the firm must have to fulfill under certain conditions otherwise the failure to do so might create serious credit worthiness issues for the target firm. 8. Details of all the banking relationships with different financial institutions i.e. lines of credits, details of assets given under encumbrances, details of various charges created against the assets of the firm etc. 9. Copies of any litigation filed against or by the firm and their status. The details of all the litigations which have been decided in the recent past in favor of the firm or against it. 10. Details of various decrees passed by the courts for and against the firm and their actual outcome in terms of their legal consequences. 11. Management organogram and distribution of duties and accountability to various incumbents at the top level of the management. 12. The details of the compensation paid to the higher management of the firm in terms of bonuses and other perks. 13. Details of any negotiations with the union and other related groups of stakeholders and their outcome because such details can provide an insight into future relationship between the management and the labor unions. The above documents may provide further insight into the overall legal risk faced by the firm and how NIKE can position itself against such risks after the formation of successful joint venture. The following section of this report will present discussion about some of the issues which need to be taken into consideration before meeting with the target company’s executives for the first meeting. Issues for Discussion 1. Adidas’s merger with Reebok may create significant anti-trust issues for NIKE and its joint venture may further complicate the legal risks involved in the transaction. Though from a commercial point of view this joint venture may seem a more plausible and profitable option but from the perspective of legal issues, this transaction may further become complicated. 2. Adidas has been engaged in legal battle with the Wal-Mart for brand infringement as well as other product related issues. However, it is critical to note that the Adidas was in partnership with Wal-Mart and despite being trade partners, it went against Wal-Mart. This may therefore indicate that the Adidas may be involved in such legal battles with the NIKE also despite forming the joint venture. 3. The labor practices of Adidas especially at some of its Central American manufacturing locations have been largely criticized and been dubbed as unethical as well as illegal. There has been significant pressure on Adidas to correct such practices however, despite the social pressures from different stakeholders, Adidas is still involved in such practices. Since the consumers are becoming more conservative and ethical in nature therefore such practices of Adidas can significantly create possibility for the future litigations. 4. Adidas has been involved in reported incidences of discrimination against labor at its Hermosa Manufacturing facility where labors have reported the blacklisting, withdrawal of wages as well as other discriminations against labors. This issue is yet to be resolved by the Adidas despite the lapse of considerable time period. 5. Sportswear industry, as a whole is subject to strong criticism from various consumers groups because of its alleged involvement into unethical business practices. This overall mood of the consumers therefore may be a significant strategic and legal risk because firms may be held accountable by the court of law. Read More