PROCTOR & GAMBLES ACQUISITION OF GILLETTE

Group 2 Akshat Sardana 12P003 Vaibhav Moona 12P059 Preetish Rao 12P094 Arvind Uppada 12P111

P&G

Established in 1837

Head Quarters Ohio, Cincinnati, USA

Sales Number $ 83.68 billion Fiscal Year 2012

Category House, Personal Beauty, Baby, Health & Wellness and Pet

About 300 brands (50 leadership brands which generate 90% sales)

Employee 127,000 employees

GILLETTE
1984 ORAL B, the company of toothbrushes and mouth care 1998: Created a new shaving system Gillette MACH3

Founded in 1901 at Boston, Massachusetts

In 1967 BROWN GmbH, manufacturer of drying electric shavers and electrical small devices

In the year 1996 Gillette takes over DURACELL, the company of big batteries

MERGER
Share for share exchange valued at 55.6 billion USD P&G offering 0.975 its share for each share of Gillette

Premium 18%
Combined Companies retained P&Gs name On hand announcement of stock buyback of 18-22 billion USD funded by debt Very similar organizational structures Complementary brands, markets and technologies

House

Personal Beauty

Personal Beauty

Razors, Blades, Personal Products

Baby

Batteries

Health & Wellness

Health & Wellness

Oral Care: Toothbrushes

Pet

Discussion Questions!!

Q1: IS THIS DEAL A MERGER OR A CONSOLIDATION FROM A LEGAL STANDPOINT?

Merger: In a merger, one company takes over another company including all assets and liabilities. The company that takes over remains active and other company ceases to exist. Consolidation: In consolidation, two or more companies merge to form one newer, larger company. All of each companys assets and liabilities become the property of the new company. P&Gs acquisition of Gillette is a merger as: The Gillette companys assets were incorporated into a P&G unit internally as Global Gillette In July 2007, Global Gillette was dissolved and incorporated into Procter & Gamble's other two main divisions, Procter & Gamble Beauty and Procter & Gamble Household Care. Gillette's brands and products were divided between the two accordingly.

Q2: IS THIS A VERTICAL OR HORIZONTAL MERGER?

Vertical Merger: Business model, companies expand by gaining control of their entire supply chain. Forward or backward integration - towards end consumer or towards the raw materials for goods production.

Benefits It allows a company to control the entire manufacturing process, from raw goods to the end consumer.

Drawbacks The drawback to this control is a loss of flexibility

This usually translates to better cost and quality control, since the company can set its own prices for raw goods and manufacturing

Horizontal Merger: If a company horizontally integrates, it acquires or merges with other companies that do the same thing (competing company) Benefits Horizontal integration allows a company to expand into new territories without the high expense of building from scratch Horizontally integrated businesses may benefit from economies of scale Once a company reaches a certain size, the cost of increased business operations grows at a much lower rate than the profit from those activities. Drawbacks For smaller companies, the drawback of this type of integration lies in consumer perception. Horizontal integration usually takes the form of a merger or acquisition, and these actions tend to be perceived as greedy or aggressive

As a result, the final company may suffer from a poor reputation and decreases in consumer goodwill.
Larger companies may find that antitrust or anti-monopoly laws slow or even halt horizontal integration processes, nullifying any cost-saving effect.

P&Gs and Gillette Merger was a Horizontal Merger!!

Q3: WHAT ARE THE MOTIVES BEHIND THE DEAL?

Economies of scale Marketing economies of scale: Removing redundancy in licenses paid for similar products (P&G: Disney, Gillette: Spiderman) Technical economies: Lay-off of 6000 staff from Gillette P&Gs global business services to support Gillette Global no. 1 player: enhanced bargaining power Supply chain retailers Economies of scope Introduction of razors for women Entry of Gillette into other consumer care lines Cost synergies Making available best-in-class costs to Gillette US$1.2bn identified as cost reduction Improving operating profit to 25% Revenue growth Gillette acquisition to raise 2005-2010 revenue CAGR by 1% Geographical diversification Entry of P&G into fast growing economies such as India and Brazil Providing entry to Gillette to China through P&G network Demographic diversification Women generally been P&G focus Gillette provides a strong brand for furthering reach to male segment Reverse synergy Understanding branding and production practices of a strong marketing rival Balanced portfolio Between i. Baby, family and household; and ii. Health and beauty 12 US$1bn brands in first segment, 10 in second

Q4: IMMEDIATELY FOLLOWING THE ANNOUNCEMENT, P&GS SHARE PRICE DROPPED BY 2% AND GILLETTES SHARE PRICE ROSE BY 13%. EXPLAIN THE REASON.

Fall in P&G share price

Rise in Gillette share price

Premium higher compared to previous transactions Stock buyout:

assumptions of share overvaluation Ownership dilution

Premium higher compared to previous transactions

Stock buyback of US$22bn through debt

Q3: WHY DID P&G BUYBACK SHARES THROUGH DEBT? WHAT ARE LONG TERM IMPLICATIONS?

By buying back the shares, P&G is trying to increase the value of the investor Buy-back of shares increase the share-price as it creates demand for shares The liability of the company decreases as it wont be needing to pay dividend on those shares anymore Debt increases tax-savings Free cash available can be used in growth opportunities Incremental increase in borrowings can hurt P&G in the long run as it can hurt its debt rating