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Adidas, Reebok, & Nike

Yesterday brought news that Adidas is poised to take over Reebok, the rival sports apparel manufacturer. The $59 bid represents a 34 per cent premium over the closing price of Reebok shares on Tuesday, and the shares promptly soared to $57 in yesterday's trading.

Both the AP story and the WSJ ($) credulously report Adidas' spin on the deal, that the combined firm would "compete more forcefully with Nike."

If the market believed that assessment, Nike's share price would fall. But since the opening of trading on Tuesday, Nike's share price has risen $5.50 to $87 - a healthy, statistically significant return for a two day holding period. The market for Nike stock thus assesses the deal somewhat differently than the spin offered by Adidas.

Students of antitrust economics will immediately understand what the market is suggesting. Rather than creating a more effective competitor to Nike, the merger eliminates a rival responsible for price competition in the market for sneakers. Less vigorous price competition would increase the value of existing competitors, i.e. Nike.

Should the merger be stopped if that's what's going on? I don't have an answer for that, but the antitrust authorities in Europe and the U.S. will be on the case.

If I were a Reebok shareholder, $57 looks a price that might be worth taking. I'd cash in now, and let the merger arb shops absorb the risk that the deal blows up.