PROCTOR & GAMBLE’S

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

Founded in 1901 at Boston,

Massachusetts

In 1967 BROWN GmbH,

manufacturer of drying electric

shavers and electrical small

devices

1984 “ORAL B”, the

company of toothbrushes and mouth

care

In the year 1996 Gillette takes over “DURACELL”, the

company of big batteries

1998: Created a

new shaving system Gillette MACH3

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&G’s 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

Baby

Health & Wellness

Pet

Personal Beauty

Batteries

Health & Wellness

Razors, Blades,

Personal Products

Oral Care:

Toothbrushes

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 company’s assets and liabilities become

the property of the new company.

P&G’s acquisition of Gillette is a merger as:

The Gillette company’s 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 Drawbacks

It allows a company to control the entire

manufacturing process, from raw goods to the end

consumer.

This usually translates to better cost and quality

control, since the company can set its own prices for

raw goods and manufacturing

The drawback to this

control is a loss of

flexibility

Benefits Drawbacks

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.

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.

Horizontal Merger:

If a company horizontally integrates, it acquires or merges with other companies

that do the same thing (competing company)

P&G’s and Gillette Merger was a Horizontal Merger!!

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&G’s 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

Q3: WHAT ARE THE MOTIVES BEHIND THE DEAL?

Q4: IMMEDIATELY FOLLOWING THE ANNOUNCEMENT, P&G’S SHARE PRICE DROPPED

BY 2% AND GILLETTE’S SHARE PRICE ROSE BY 13%. EXPLAIN THE REASON.

Fall in P&G share price

Premium higher

compared to previous

transactions

Stock buyout:

assumptions of share

overvaluation

Ownership dilution

Stock buyback of

US$22bn through debt

Rise in Gillette share price

Premium higher compared to

previous transactions

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 won’t

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

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

TERM IMPLICATIONS?