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QUESTION 1

CASE STUDY-Procter & Gambles Acquisition of Gillette

The potential seemed almost limitless, as Procter & Gamble Company (P&G) announced that it had completed its purchase of Gillette Company (Gillette) in late 2005. P&Gs chairman and CEO, predicted that the acquisition of Gillette would add one percentage point to the firms annual revenue growth rate, while Gillettes chairman and CEO, opined that the successful integration of the two best companies in consumer products would be studied in business schools for years to come.

Five years after closing the deal, things did not turned out as expected. While cost savings targets were achieved, operating margins faltered due to lagging sales. Gillettes businesses, such as its pricey razors, were buffeted by the 2008/2009 recession and had been a drag on P&Gs top line rather than a boost. Moreover, most of Gillettes top managers have left. P&Gs stock price at the end of 2010 stood about 12% above its level on the acquisition announcement date.

On January 28, 2005, P&G enthusiastically announced that it had reached an agreement to buy Gillette in a share-for-share exchange valued at $55.6 billion. This represented an 18% premium over Gillettes pre-announcement share price. P&G also announced a stock buyback of $18 billion to $22 billion, funded largely by issuing new debt. The combined companies would retain the P&G name and have annual 2005 revenue of more than $60 billion. Half of the new firms product portfolio would consist of personal care, healthcare, and beauty products, with the remainder consisting of razors and blades, and batteries. The deal was expected to dilute P&Gs 2006 earnings by about 15 cents per share. To gain regulatory approval, the two firms would have to divest overlapping operations, such as deodorants and oral care.

P&G had long been viewed as a premier marketing and product innovator. Consequently, P&G assumed that its R&D and marketing skills in developing and promoting womens personal care products could be used to enhance and promote Gillettes womens razors. Gillette was best known for its ability to sell an inexpensive product (e.g., razors) and hook customers to a lifetime of refills (e.g. razor blades). Although Gillette was the number 1 and number 2 supplier in the lucrative toothbrush and mens deodorant markets, respectively, it has been much less successful in improving the profitability of its Duracell battery brand. Despite its number 1 market share position, it had been beset by intense price competition from Energizer and Rayovac Corp., which generally sell for less than Duracell batteries.

Suppliers such as P&G and Gillette had been under considerable pressure from the continuing consolidation in the retail industry due to the ongoing growth of Wal-Mart and industry mergers at that time, such as Sears and Kmart. About 17% of P&Gs $51 billion in 2005 revenues and 13% of Gillettes $9 billion annual revenue came from sales to Wal-Mart. Moreover, the sales of both Gillette and P&G to Wal-Mart had grown much faster than sales to other retailers. The new company, P&G believed, would have more negotiating leverage with retailers for shelf space and in determining selling prices, as well as with its own suppliers, such as advertisers and media companies. The broad geographic presence of P&G was expected to facilitate the marketing of such products as razors and batteries in huge developing markets, such as China and India. Cumulative cost cutting was expected to reach $16 billion, including layoffs of about 4% of the new companys workforce of 140,000. Such cost reductions were to be realized by integrating Gillettes deodorant products into P&Gs structure as quickly as possible. Other Gillette product lines, such as the razor and battery businesses, were to remain intact.

P&Gs corporate culture was often described as conservative, with a promote-from-within philosophy. While Gillettes CEO was to become vice chairman of the new company, the role of other senior Gillette managers was less clear in view of the perception that P&G is laden with highly talented top management. To obtain regulatory approval, Gillette agreed to divest its Rembrandt toothpaste and its Right Guard deodorant businesses, while P&G agreed to divest its Crest toothbrush business.

The Gillette acquisition illustrates the difficulty in evaluating the success or failure of mergers and acquisitions for acquiring company shareholders. Assessing the true impact of the Gillette acquisition remains elusive, even after five years. Though the acquisition represented a substantial expansion of P&Gs product offering and geographic presence, the ability to isolate the specific impact of a single event (i.e., an acquisition) becomes clouded by the introduction of other major and often uncontrollable events (e.g., the 2008/2009 recession) and their lingering effects. While revenue and margin improvement have been below expectations, Gillette has bolstered P&Gs competitive position in the fast-growing Brazilian and Indian markets, thereby boosting the firms longer-term growth potential, and has strengthened its operations in Europe and the United States. Thus, in this ever-changing world, it will become increasingly difficult with each passing year to identify the portion of revenue growth and margin improvement attributable to the Gillette acquisition and that due to other factors.

Required;

1. Identify the type of merger in this transaction? How does it differ from the other types of mergers? Explain your answer. (5 marks)
2. Find four (4) motives for the deal and discuss the logic underlying each motive you identify. (8 marks)
3. Immediately following the announcement, P&Gs share price dropped by 2 percent and Gillettes share price rose by 13 percent. Explain why this may have happened?(4 marks)
4. P&G announced that it would be buying back $18 to $22 billion of its stock over the eighteen months following closing. Much of the cash required to repurchase these shares requires significant new borrowing by the new companies. Explain what P&G may have been trying to achieve in deciding to repurchase stock? Explain how the incremental borrowing helps or hurts P&G in achieving their objectives? (6 marks)
5. Specifically explain how actions required by antitrust regulators may hurt P&Gs ability to realize the anticipated synergy. (4 marks)
6. Explain three (3) possible obstacles that P&G and Gillette are likely to face in integrating the two businesses. How would you overcome these obstacles? (6 marks)