This paper addresses two questions associated with an assumption that the planned acquisition by Adidas Salomon A. G. (Germany) of Reebok International Ltd. (United States) will be completed. A further assumption in relation to this paper is that, subsequent to the merger, Adidas will move its headquarters from Germany to the United States and re-incorporate the surviving company as an American corporation. The two questions addressed are as follows:
1. How will this decision affect their capital budgeting decision process. For example, will the move from Germany to the US have any impact on the projects they will undertake, the incentives of the managers, their cost of capital, etc.?
2. How will this decision to move to the US affect Adidas' financing decisions? For example, will it have any effect their payout policy, their capital structure policy, and so forth?
Modigliani and Miller (1958) advanced the argument that, in the absence of corporate taxes and in a world of perfect markets and rational investors, two identical companies ù two sets of assets offering earnings before interest and taxes (EBIT) of the same size and quality ù must have the same market value regardless of differences in capital structures. The justification for this position was that, even though debt is cheaper than equity, the use of cheaper debt funds is exactly offset by the increased cost of equity capital (which arises from higher risk exposure), with the result that the firm's marginal cost of capital does not change with the addition of more debt (Modigliani & Miller, 1958).
Modigliani and Miller (1963) later refined this argument to account for the effect of corporate taxes. The revised Modigliani-Miller (MM) position is that the cost of capital will decrease because of the tax shield provided by the deductibility of interest on the firm's debt. Thus, under the revised MM theory, while the cost of equity capital continues
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