The Best deal Gillette could get:
Procter & Gamble OVERVIEW:
The Procter & Gamble Company (P &G) is a popular American Multinational consumer good corporation, Well known for its wide range of products that are facilitating in a definite market growth .Head quartered in downtown Cincinnati, Ohio, founded in 1837 by British American William Procter and Irish American James Gamble.1 . In 1837 William Procter and James Gamble started a company by their name Procter and Gamble .They started their sales in soap and candles. It specialised its product into several segments like grooming, beauty, health care, home care and fabric, baby, feminine. Before the sale of Pringles to the Kellogg Company, its product portfolio also included foods, snacks, and beverages.2In 1993 company sales were reached $30 billion .It is the first and foremost company where there 50% sales were targeted from outside U.S.
The Gillette Company was established in the year 1901 as a safety razor manufacturer .3, head quarter is in Boston, Massachusetts. It was owned by The Gillette Company, a supplier of products under various brands until that company merged into P&G in 2005. 1984 Gillette took big partnership into the ORAL B tooth brush and mouth care company. In 1996 it takes over big batteries company “DURACELL”.
In 1999, Gillette Company, total worth was US$43 billion, but it was estimated that the brand value of Gillette was worth US$16 billion. This equated to 37% of the company’s value, which was the same as DaimlerChrysler, one of the world’s largest car manufacturers at the time. 4P&G AND GILLETTE MERGER AND ACQUISITION:
On January 28, 2005, P&G announced its investment deal to acquire Boston-based Gillette for $57 billion. Procter and Gamble is the largest acquisition in the history of consumer goods industry. The annual sales of the combined entity would be $60.7 billion. After its purchase of Gillette, P&G would have 21 billion-dollar brands with a market capitalization of $200billion. According to the deal, P&G will be paying 0.975 for each share of Gillette, valuing the acquisition at a 20% premium to shareholders of Gillette. Procter and Gamble is a largest global consumer product company which is known for its segmented wide range of products that every consumer prefers in their day to day life. Gillette produces Signature razors, Dental care products, Duracell batteries. It’s not the first acquisitions that hold by P; G. It took a number of other companies where the growth rate has successfully gained for its product line and its increase in profits. These acquisition were Folgers Coffee, Norwich Eaton Pharmaceuticals (the makers of Pepto-Bismol), Richardson-Vicks, Noxell (Noxzema), Shulton’s Old Spice, Max Factor, the Iams Company, and Pantene. However these companies producing products match the product line of the P & G product. The Procter and Gamble Company market strength lays in women personal care products whereas Gillette company market strength lies in Men’s grooming products. However, the organisation structures of the companies remark same .The market place, brand and technology are having the same significance.
What were the possible synergies and forces propelling the merger between P;G and Gillette—as well as the history of other takeover attempts for Gillette?
The combined firm would also allow negotiating with large retailers like Wal-Mart. 18% of sales in P;G comes from Wal-Mart .It usually sell products by discounting. Wal-Mart’s growing dominance had prompted competing retailers to merge. There are certain potential cost synergies that may emerge from the removal of redundant management positions. James kilts and other management wanted to push the deal on the interest of P & G as because if the deal doesn’t get close there are chances by other firms in acquiring of hostile takeover that result in removing Kilts and other management at Gillette. However the investment banks helped to consort two companies.
Analyst expected the merger and acquisition would create a strong brand portfolio, new innovations opportunities from an aggregation technology (R;D department).Cost savings through elimination of overlapping marketing efforts, unnecessary production lines and Excess employees.
The acquisition leads to great operational efficiency, Geographical Expansion, Aggregation Technology. The annual advertising budget of P;G reaches the amount of about $5.5 billion (a dream client for every advertising company) and most of the targeted population are women. On the other hand, Gillette was equally strong in marketing, the budget of which was as high as $1 billion. The advertising activities of the two companies were also aiming in men, which was an additional matching for the two companies. The huge total advertising budget (5.5+ 1) that was available to the company after the acquisition of Gillette provided the new company with a major bargaining power over the media.
The possible synergies that made to single firm is the Operational (The products are easily focused and distributed with great market penetration), Financial (Improved cost of capital, Increases Revenue, Operating cost will be reduced, Increase in growth rate) and collusive factors (Aggregation of Technology, Marketing, Focus on Product, Optimizing Expenses). More than$1 billion of cost synergies expected to be achieved over a 3 year period.
The acquisition of Gillette would lead a similar sale growth that took place in Colgate acquisition by Procter and Gamble. In 2003, the margin net income earned by Gillette is $1.39 billion and $6.48 billion by Procter and Gamble. The combined firms would reach the forecasted operation margin of 25% by the end of 2015.
The consolidation of these two firms proved their relative strength in the market with the substantial increase in Their Expected Earnings over the past two years.
YearBattery Market(%) EEAOral care tooth brush (%) EEA
The above table illustrates the percentage increase change over past two years.
Gillette’s products and brands that after the takeover passed to Procter & Gamble are (Fig1):
Procter & Gamble
CEO-Alan G Lafley-Crest
-Head and Shoulders
“Touching lives, improving life”
“Gillette, the best a man can get”
Procter & Gamble
CEO-Alan G Lafley-Crest
-Head and Shoulders
“Touching lives,improving life”
Billion Dollar Brands
(P&G, Gillette after Acquisition)
-Baby & Family Care (Bounty, Pampers, Charmin) -Batteries (Duracell)
-Beauty Care (Olay, Pantene, H&S, Wella)-Small Appliances (Braun)
-Fabric & Home Care (Ariel, Downy, Tidy)-Pet Food (IAMS)
-Oral Care (Crest, Oral-B)-Health Care (Actonel)
-Snacks & Beverages (Folgers, Pringles)
-Blades & Razors (Gillette, Mach 3)
In light of Gillette’s large increase in value during James Kilt’s tenure, was his compensation reasonable? Was his pay package in the best interest of shareholders?
James M. Kilts was a chief executive officer of The Gillette Company. When he arrived at the company, he was fixed with an agenda that dealt with problems throughout the business. He uplifted the Duracell battery line, Modernised grooming products and he increased advertising to support the M3 Power, a high-tech, vibrating men’s razor that competes with Schick’s Quattro razor.
The method worked and the stock has risen about 50percent under Kilts. During his tenure the price appreciation is an indicative mark for his capability and successful planning strategy. After James Kilts became CEO the stock price has grew to 61%.And the shareholder value has been raised to $20 million dollar by the year 2005. Kilts’ compensation had a $12.6 million “change of control payment”. His total pay amounted to be more than $164 million. The compensation package had been signed in front of board and stipulated in the contract when the growth is not much. By the year 2005 he turned the company share holder value up to $20 Million. His hard work and capability at maintaining the growth of the company and increasing the value to the company seems to be no reason to say that the compensation package is unreasonable. Moreover he had a less incentive and for him to work so hard with no compensation with stock and options which definitely carries a best interest of shareholder. There is an increase in payout for CEOs in big companies according to the study published in corporate library, a firm that tracks corporate-governance. Recent higher profits significantly are the best explanation for the higher compensation.
For instance if we look at the peer industry of P;G i.e., Colgate-Palmolive the CEO was awarded with stock option of $2 million on the agreement that he would receive no additional grants for further five years. Some consultants found that the CEO compensation was below the average then soon he was awarded 2.6 Million Stock option. So, therefore it seemed to be a fair compensation when the P;G bought the company and rewarded MR James M. Kilt’s $164 million payout.
Evaluate the P&G offer. Make a list of the positive and negative aspects of receiving shares or cash from both the perspective of P&G and Gillette shareholders?
P&G paid 0.975 for each share of Gillette. The shareholders of P&G are concerned due to the company’s share price being diluted .So P;G promised to buy back its shares $18-$22 billion in the coming 12-18 months. It planned to buy the shares in cash and stock ratio of 2:3 i.e., 60% in cash and the remaining 40% in stocks. Gillette shareholders felt good as the 60% deal was made in cash so the investment gain will be reflected immediately. It also helped out in preventing share dilution that would certainly occur from issuing stock. An immediate capital gain tax and corporate income tax to be paid if the sales of their assets are higher than their book value.
Compare the valuation analyses in Case Exhibits 6 and 7. Why are they different? Support and defend the validity of using each valuation method.
Valuation analysis of the potential merger is displayed in Exhibit 6 and 7. Exhibit 6 displays Gillette as a standalone entity and Exhibit 7 Gillette has part of P;G portfolio of products. The valuation analysis in exhibit 6 and 7 shows difference because Gillette and P;G are different in their business
They are different because Gillette is quite diverse in its different businesses, including men’s razors, Duracell batteries and toothbrushes, so the sum-of-the-parts valuation would produce a higher valuation than the standalone DCF valuation analysis is a best valuation approach as Gillette was planning to remain in its entity after the merger. If the planning to divert of its business after the merger, it is likely that the sum of the parts valuation would be more valid.Discuss the conflicts of interest for the investment bank in an M&A transaction where the same firm that writes the fairness opinion in support of the deal stands to be paid a large fee if the transaction is completed.
Obviously No firm would discuss the fair and unfair deal with its shareholders especially once the transaction is done. The bank do not do not think it would be a fair deal, this leads to conflict of interest as they would push the deal to completion for getting fee and so they regard it as a fair deal .
Should investment bankers and companies spend their time appeasing politicians worried about the effects of possible mergers? Are politicians representing the interests of the American public when they question the merits of a deal? Also evaluate the role played by federal and international regulators. Is there any better solution to the complicated regulatory process?
In the time of merger and acquisition a lot of parties like government agencies, Politicians, Managers, Employees certainly affected so when the deal is to be finalized all parties are taken into consideration by the investment bankers and companies, so that no obligations and hurdles will rise. The long term social and economic impact is the main factor where politicians worry during merger. As the Employment losses definitely have adverse impact on the politician’s prospects. So it would be safe to conclude the politicians as a representative the best interest of the American Public. Federal and International regulators want to be sure that the deal would be fair for all shareholders, customers and Employees. Federal regulators take care of US citizens while International regulators worry about Consumer world-wide. They look after the federal and antitrust laws that should not be violated by the consolidated company. A complex process is followed such as Forms are to be filled by SEC and it should be scrutinised by the FTC and other consumer.
Legal due diligence is required in minimizing the legal risks with the merger and acquisition. In understanding, adapting and following every legal procedure appropriately. To verify all legal relevant factors and requirements associated with the proposed business transactions a qualified and experienced financial and legal advisor. Expertise Legal advisor provide advice in antitrust and helps in regulating regulatory matters that are complicated.
Evaluate the role played by Warren Buffett in the merger. Should the support of one investor be a deciding factor in the completion of an M;A transaction?
The deal would not be approved unless the majority 50% shareholders support, and so Buffett’s approval including his enormous 11% shares in the company. He was the crucial key in getting the approval of all other shareholders .He is the major investor whose opinion is respected in the investment community. The support of one investor can’t be a deciding factor in the closing of M;A transaction .It is not a good thought where an individual investor influences the decision making of the company for his own personal reasons.
The merger and Acquisition of P;G and Gillette through synergy improve the company’s performance for its shareholders. Value of performance of the consolidated company will be a positive impact than the sum of the separate individual parts. Two firms as a single entity generate more revenue and improve the growth of financial performance with a competitive edge in the consumer goods industry.
“History_of_innovation”. Procter & Gamble. Retrieved February 15, 2016.
“Procter & Gamble board meets amid CEO reports”. Boston Herald. Associated Press. June 9, 2009. Retrieved May 5, 2012.
Gillette, K.C. (February 1918). “The Gillette Blade”. 1 (4): 9.
Jane Pavitt. Brand New, September 2000. ISBN 0-691-07061-X.