158922364-m-a-p-g-gilette-pptx
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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?