http://www.businessweek.

com/stories/2005-06-15/in-a-lather-over-the-gillette-deal
By William C. Symonds and Robert Berner
With Gillette (G) shareholders scheduled to vote on the company's $57 billion merger with Procter & Gamble (PG) on July
12, Massachusetts Secretary of the Commonwealth William F. Galvin is turning up the heat in his investigation of the fairness
opinions used to justify the deal.
In early June, he spent hours questioning Gillette CEO James Kilts and other senior execs. And on June 13, he subpoenaed
Goldman Sachs (GS) CEO Henry M. Paulson, Jr., whose firm provided one of the fairness opinions -- independent
assessments that affirm a transaction is fair to company shareholders -- as well as three current and former Gillette directors.
"This is not for show," warns Galvin, a caustic critic of the merger who says he hopes to "provide information" to
shareholders before the vote.
TAINTED FAIRNESS OPINIONS. Meanwhile, corporate-governance groups are sharply criticizing the $450 million that Kilts
and 16 other top Gillette execs stand to receive in severance, change-of-control, and other benefits. "The Gillette merger
could become a poster child for this kind of dealing aimed at producing a very rich executive payday," says James Malican,
president of Proxy Governance, a proxy-advisory firm based in Vienna, Va.
Many Gillette retirees are also up in arms. "It's obscene what Kilts is getting," fumes retired Gillette Vice-Chairman Joseph
E. Mullaney, referring to the $165 million Kilts stands to receive for the merger and for staying on for an additional year
with P&G. "Gillette would absolutely be better off independent," he argues.
But unless Galvin produces a bombshell -- such as evidence of fraudulent misconduct -- even most critics concede they
won't be able to stop a merger that has been hailed as a "dream deal" by Warren Buffett, chairman of Berkshire Hathaway
(BRKB), which is Gillette's largest shareholder. "I think the deal will go through," says Mullaney. Even so, Galvin's
investigation could become a benchmark in the growing outcry against the conflicts of interest that often taint the fairness
opinions issued in blockbuster deals.
LIMITED AUTHORITY. Moreover, "Galvin's investigation could be a harbinger of things to come," if officials in other states
begin to question unpopular mergers, predicts Joseph A. Franco, a professor of securities law at Boston's Suffolk University,
who used to work at the Securities & Exchange Commission.
Galvin, who has been compared to New York Attorney General Elliot Spitzer because of his investigations of the securities
industry, has already reaped political benefits from his aggressive attack on a merger that's unpopular with many Gillette
stakeholders in Boston. Since beginning his probe, he has been flooded with calls from Gillette retirees worried their
generous health benefits will be cut, company employees fearing they'll lose their jobs, and citizens concerned that Boston
is losing its best-known corporate icon. "This deal is not good for Massachusetts," says Galvin, who attacks Kilts as an
insensitive carpetbagger.
Problem is, Galvin can't regulate the merger. His authority is limited to the fairness opinions issued by Gillette's two
investment banks, Goldman and UBS Securities (UBS). Soon after the deal was announced, Galvin hired Rajesh K. Aggarwal,
now a finance professor at the Carlson School of Management at the University of Minnesota, to study those opinions.
COMPROMISED PLAYERS. Aggarwal found that while the opinions "seem reasonable," there were "substantial discrepancies
in the [internal and public] estimates of how valuable the merger" would be. While company officials publicly said the deal
could generate synergies of $14 billion to $16 billion, internal discussions suggested they would be much larger, ranging
from $18.82 billion to $28.55 billion, or some $19 to $29 a share. Yet Gillette shareholders are getting just $9 a share of
this value, Aggarwal wrote. The implication: Gillette may have been sold short.
Galvin also complains that UBS and Goldman are hardly impartial arbiters of the deal's fairness. "The fairness providers
were very involved in the creation of the deal," he complains, noting that Goldman's Paulson actually played a key role in
restarting negotiations with P&G in January. Beyond that, both Goldman and UBS stand to earn up to $30 million if the deal
is completed.
"How fair or accurate can it be when you have people who are compromised by their involvement in the deal?" asks Galvin,
who compares this situation to asking a broker representing a prospective buyer of your house to do an appraisal of the

house. For now, Gillette will only say, "We're cooperating with Secretary Galvin's inquiry regarding the banks' fairness
opinions," adding, "It's not appropriate to comment at this time on any aspect of the inquiry."
But others are not so reticent. "The issues Galvin has raised are good ones," says Charles M. Elson, director of the John L.
Weinberg Center for Corporate Governance at the University of Delaware. Galvin's crusade could help further the cause of
reformers who argue independent firms should be hired to write fairness opinions.
BIG INCENTIVE. To actually slow or stop the Gillette deal, however, Galvin must clear a huge hurdle. "He has to find a
smoking gun to have a chance," says Suffolk University's Franco. Even then, "If he found fraudulent misconduct by the
bankers, he can only proceed administratively against them," adds Franco. While that might force Gillette to rewrite the
proxy, it wouldn't necessarily kill the deal.
Meanwhile, other critics contend that Gillette's executives also had strong personal reasons to approve this deal: The huge
golden parachutes they would automatically receive in any merger.
Ironically, "we put these provisions in to fight off the hostile takeovers" Gillette faced in the late '80s, says Mullaney. The
"single-trigger" provisions provide that options and other stock awards vest upon change of control. "And that gave Kilts a
huge incentive to do this," he complains.
LOOKING AFTER NO. 1? Making matters worse, Kilts is also receiving both a huge severance package from Gillette, plus a
"raise" that Aggarwal values at $11.3 million for working for P&G for an extra year. Experts argue it's highly unusual for a
CEO to get a severance payment when he isn't being fired, plus a bonus for staying on the job.
"This is simply sending good money after bad," argues Paul Hodgson, a senior research associate at the Corporate Library,
an independent research firm. Hodgson calls Kilts's package "one of the highest I've seen in an M&A situation."
On top of that, Kilts negotiated this lucrative bonus at the same time he was negotiating the acquisition price, according to
Gillette's proxy. That raises the question of whether he placed his interests before shareholders, says Randall Thomas, a
business law professor at Vanderbilt University. "There's a potential conflict," says Thomas.
A Gillette spokesman strongly defends Kilts's lucrative package. "Mr. Kilts's compensation is entirely appropriate, given the
fact that under his leadership the company achieved all, and exceeded many, of its strategic-growth objectives. Gillette has
been transformed from a chronic underperformer to a company that's delivering consistent, top-tier performance."
"GOOD MERGER." As a practical matter, "The only way to register opposition [to excessive pay] is to vote against the
merger," says Carol Bowie, director of governance research for the Investor Responsibility Research Center. At least one
corporate-governance group says it's considering calling for a vote against the merger on these grounds.
But most shareholders are likely to focus instead on the broader merits of the deal, which Gillette argues "is the opportunity
of a lifetime to create the best consumer-products company in the world."
Take Greg Luttrell, manager of the large-cap growth fund at TIAA-CREF, which owns some 6 million Gillette shares. "These
two companies bring some very complementary assets to the mix," Luttrell reasons. "While it's difficult to say if Gillette
could have gotten a higher price, the price paid was pretty fair, and I think it will be a good merger," adds the fund manager,
who plans to vote "yes." As things stand now, he'll have plenty of company on July 12.
Symonds is Boston bureau chief for BusinessWeek.
Berner is a correspondent in BusinessWeek's Chicago bureau