Case Study: P&G- Gillette Merger

The P&G-Gillette merger is one of the biggest mergers in the history of the consumer goods industry. The
merger gives P&G access to new products and markets, and change the dynamics of the consumer goods
industry.

On January 28, 2005, Cincinnati-based P&G announced its investment deal to acquire Boston-based Gillette for $57
bn to become the world's largest consumer goods company. The annual sales of the combined entity would be $60.7
bn. After its purchase of Gillette, P&G would have 21 billion-dollar brands with a market capitalization of $200bn.

According to the deal, P&G will be paying 0.975 for each share of Gillette, valuing the acquisition at a 20%
premium to shareholders of Gillette. The shareholders of P&G are apprehensive of the company's share prices being
diluted. To avoid such problems, P&G has promised to buyback its shares, worth $18-$22 bn, over the coming 12-
18 months. P&G plans to pay Gillette 40% in cash and the rest 60% in stock. Marketing guru Al Ries feels that,
"The extra 20% premium paid by P&G for Gillette's stock is going to make it 20% more difficult for the deal to pay
dividends to stock holders".

By acquiring Gillette, P&G will be adding the world's best shaving products to its portfolio. This is what
P&G's CEO A G Lafley thinks is necessary to overtake their close competitors, particularly in developing
countries. Both the firms' CEOs termed the deal as a friendly move, and added that it would benefit both the
firms equally.

According to analysts, the merging companies had many similarities ,a corporate history that is more than a
century old, billion-dollar brands, and pioneering consumer product marketing initiatives. The merger was
also said to have been based on a different model where innovation was the focus rather than scale. It was
called a unique case of acquisition by an innovative company to expand its product line by acquiring another
innovative company.

Analysts described the merger as a perfect mattaiage. Some analysts felt that regulatory concerns raised by
the merger could relate to product overlaps between both companies, in order to determine whether the
combined firm would have the power to set prices. There were concerns that strong overlaps in toothbrushes
and toothpaste could result in regulators seeking some divestitures, although P&G would like to keep as
many Gillette brands as it can. However, according to Christo Lassiter, a law professor and antitrust specialist
at the University of Cincinnati, the deal would easily win regulatory approval, as P&G and Gillette mostly
sold different products to different customers. Lassiter also said the government had realized that preventing
US companies from expanding would make them vulnerable to foreign competition. So it has become
tolerant of big mergers. Objections, however, were expected to come from European Union antitrust
regulators in Brussels, as the deal would give the merged company added strength in the overseas markets.

A Compulsion Rather Than a Choice

The consumer goods industry grew rapidly from the 1950s through the 1980s. However, after this period, the
industry's growth slowed down. Slow sales growth, increasing cost of inputs, emergence of private labels,
lower margins, difficult price negotiations, and the increasing diversity of channels, choices and consumer
types posed new challenges for this $2 trillion plus industry.

In recent years, major retailers had consolidated and manufacturers of consumer goods were facing pressure
from them in pricing, delivery, and standardization conditions. Wal-Mart, the world's largest retailer, had
expanded rapidly by adding 484 stores since 2000. By the end of 2004, it had 3,013 stores in the US. It
accounted for about 8% of total retail sales in America, and its increasing presence in the rest of the world
had put it in a position of strength. Over the years, it had built a reputation of passing costs on to suppliers.
Wal-Mart's growing dominance had prompted competing retailers to merge. The emergence of the $11 bn
combination of Kmart and Sears Roebuck as the third-largest retailer in the US market was driven by the
need to gain purchasing clout over suppliers. They had been negotiating lower prices after their merger
announcement in November 2004.

The main players who competed in the consumer goods industry were renowned names like P&G, Colgate-
Palmolive, L'Oreal, Kimberly Clark and Masco in the Household and Personal Products category. Other
players in this category included Gillette, Revlon, Henkel, and Reckitt-Benckiser. Bic. Nestle, Unilever,
Pepsico, Conagra Foods and Sara Lee dominated the Food Consumer products segment. Johnson & Johnson
was a big player in the Healthcare category. Most players had been gaining size with acquisitions in the
recent past. Competition had made promotional offers a norm in the industry, and advertising and marketing
costs had increased due to stiff competition.

A key development in the industry had been the successful emergence of private-label brands. Consumers
didn't want to pay the highest possible price for goods just because of the brand name any more. In a recently
conducted research, shoppers' willingness to buy branded goods had dropped by 12 percentage points, from
84% in 1997 to 72% in 2003. By 2009, this was expected to decline further to 66%. Consumer goods
companies needed to handle this pressure from private labels, most of which were produced by big retailers.

Retailers and suppliers were increasingly making use of information technology to efficiently manage their
operations. Wal-Mart had demanded that suppliers should fit their packaging with Radio Frequency
Identification (RFID) chips to help track goods through the supply chain. As retailers continued to put
pressure on manufacturers for lower prices and private labels mushroomed, product innovation became
extremely important.

Why Gillette?

The question that comes to mind is, why did P&G have to acquire Gillette? Moreover, why did Gillette have
to sell off its business, notwithstanding its power-packed performance in the global marketplace?
Acquisitions are not new for P&G. The company bought the hair care firm Clairol from Bristol Myers Squibb
in 2001 for $4.9 bn, and the German hair care firm Wella AG in 2003 for $7 bn. The companies acquired by
P&G in the past were producing product(s) that matched P&G's product line. However, this deal is different.
While P&G's strength lies in women's personal care products with brands such as Olay, Always,
Tampax, Cover Girl and Max Factor, Gillette's strength is in the men's grooming category with an entire
range of Gillette and Braun products. According to Lafley, "This combination of two best-in-class consumer
products companies, at a time when they are both operating from a position of strength, is a unique
opportunity". Added James M Kilts, CEO, Gillette, "This marks the realization of a historic next phase of
great opportunity for Gillette and also for P&G. It brings together two companies that are complementary in
their strengths, cultures and vision to create the potential for superior sustainable growth." Refer to Table 1
for a comparison of both the companies.

According to reports, Gillette's stocks has climbed 50% since the beginning of 2003 and profits too jumped
after the firm focussed on premium products, like its Mach3 razors, and employed long-term contracts with
retailers. Generally, a stronger company acquires a weaker company, but this is not the case here. Both the
firms are strong and competitive in their own segments, and are coming to combine their forcesa unique and
unusual combination.

The acquisition would add about 20% to P&G's sales. This is significant in an industry where sales growth is
difficult to achieve. According to an interesting comparison, P&G's acquisition of Gillette would be similar to
adding Colgate's sales to P&G's. Gillette had a net income of $1.39 bn in 2003, while P&G had $6.48 bn. The
combined company forecasted operating margins of around 25% by the end of 2015, in comparison to
margins of 19.1% in 2003.

Taking Gillette's growth potential into account, P&G had increased its long-term sales-growth estimates to 5-
7% a year, that is, approximately $500 mn each year. According to a research report from Citigroup analyst
Wendy Nicholson, the razors-and-blades business would account for 7% of sales and 12% of operating
profits of the merged entity. Sales of men's grooming products in the US totaled $3.5 bn in 2004, and were
expected to touch $8 bn by 2007. After the deal, health and beauty products would account for half of P&G's
portfolio of products. Major gains could also come from bargaining with retailers on prices that would boost
margins.

The companies expected cost savings of $14-16 bn from combining back-room operations and new growth
opportunities. This would make the merger profitable in the third year. One of the areas of cost savings would
be eliminating jobs. Both companies would also benefit from adapting each other's technologies and joint
research and development. For example, in the area of RFID adoption, P&G and Gillette were early
participants and much of their initial investment was likely to have been completed

Together they would have even more resources to enable intensive collaborative supply chain initiatives in a
more cost-effective way. The merger would also bring down the advertising and media costs owing to greater
bargaining power. P&G had already been using its buying power to negotiate for the lowest prices. It had
spent $5.5 bn on advertising in 2004more than any other company, according to Advertising Age magazine.
Gillette had spent about $600 mn on marketing.

The two companies had representation on a global scale with their products being marketed around the world.
Also, both companies were looking at developing markets. According to Lafley, Gillette would give exposure
to P&G in emerging economies like India and Brazil, while P&G would distribute Gillette products in China.
(Refer to Table II for comparison of geographic sales of P&G and Gillette). Analysts felt that P&G and
Gillette could bring new products into the market more quickly, and learn from each other's strengths.
However, according to marketing guru Al Ries, "a merger that broadens a company's product line just makes
the company bigger without producing any marketing advantages".
Undoubtedly, the $57 bn deal will redefine the Fast Moving Consumer Goods (FMCG) industry. The deal
will give P&G the strength to compete with the Netherlands-based Unilever, and will make it the world's
largest consumer and household goods company by both market capitalization and revenue growth. Though
company officials feel that the deal would give P&G high bargaining power with retailers like Wal-Mart,
according to Nirmalya Kumar, Professor of Marketing, London Business School, the impact may not be very
significant, as Wal-Mart does not negotiate prices with P&G as a whole, but separately for each product.

According to some business analysts, the deal will create an enterprise which will be unmatched in
geographical reach and competition. It will give P&G the much needed boost to further strengthen its product
categories where at present it has negligible presence. The deal will help P&G unite some of the world's
leading and finest products under one roof and provide the company with an additional hold in the upcoming
market of men's shaving products, an area where its biggest rival Unilever does not have a presence at all.
According to a former UK-based Gillette employee, "The deal will help Gillette in improving its inventory
days." Though Gillette has strong brands, it is operationally insufficient when seen from market standards. At
present, Gillette operates at 120 days with the standard (CPL) of 80-90 days. The deal will help Gillette
overcome this inefficiency.

Integration Issues
Kilts would be the vice-chairman of P&G, and would lead the integration for a year. The merger would result
in around 6,000 job cuts, equivalent to 4% of the two companies' combined workforce of 140,000. Most of
the downsizing will take place to eliminate management overlaps and consolidation of business support
functions. Although managing cultural issues is very important in mergers, especially cross-border ones, in
this case, such problems were virtually absent given the geographic proximity of the two firms' headquarters
at Cincinnati and Boston. However, P&G is considered a promote-from-within company, and already had a
lot of executive talent at the top. Therefore, absorbing Gillette's management to their satisfaction could be
difficult. According to some analysts, P&G's ability to handle this massive cultural assimilation would decide
the success or failure of this acquisition.

According to Lafley, three potential categories that could help the combined company grow would be oral
care, women's hair removal and male grooming. P&G could use its "technology transfer" ability (which
refers to its drive to take technology from one brand and use it in another) for Gillette's products.
Opportunities for product integration could also be possible in the $10 bn women's hair removal market that
was growing at a rate of 8% per year. For example, it could apply some of its technology used in Olay skin
care to Gillette's women's razors. A major focus area could be the invention of new products. In addition,
P&G could promote Gillette brands together with compatible P&G products (Refer to Table III for potential
products for co-promotion).

According to some analysts, P&G's acquisition of Gillette will result in an overlap/clash of some brands or
products. P&G's Crest toothbrush, Old Spice, Secret and its battery will clash with Oral-B, Right Guard,
SoftnDri and Duracell brands of Gillette. This will be a cause for concern for both companies.

Future Outlook

Some analysts felt that the P&G-Gillette merger was a defensive move by P&G to check the growing power
of retailers. In the retail industry, there has been a struggle for power between vendors and retailers, and
retailers have taken the upper hand recently. However, other analysts disagreed, explaining it as an aggressive
move for achieving growth rather than a balancing act. Some analysts felt that the deal was a right move as it
aimed at product diversification. Davis Dyer, a corporate historian and author of Rising Tide, a history of
Procter & Gamble, opined that acquiring Gillette would round out a personal care product range that tilted
heavily toward women. He felt that it was more important, given the fact that P&G's recent acquisitions of
hair care brands Clairol and Wella AG had reinforced that imbalance.

According to analysts, the P&G-Gillette deal created merger pressure for competitors in the industry. They
also added that P&G would have at least some time in hand before its rivals catch up with it. Most of the
competitors were in bad health, and needed to reformulate their strategies in light of this deal. So P&G could
focus on integration without having to bother too much about competition.

Unilever, P&G's archrival, had been under fire from investors for missing earnings targets, and had been
forced to rethink its 2005-2010 strategy in light of low sales, changing consumer trends and price wars. The
struggling Anglo-Dutch firm was already under pressure to improve its performance. It may need to acquire
other firms to keep in pace with P&G. Unilever products included Calvin Klein fragrances, Birds Eye foods,
Hellmann's mayonnaise, Lipton tea and Dove soaps. The Company announced on February 10, 2005 that
although it had a 6% earnings growth for the third quarter, its business was hurt by strong competition and
weak demand. Sales of its Ben and Jerry's ice cream and Lipton tea had fallen. The company said it was well
into a five-year plan that included focusing on a smaller number of global brands and selling businesses that
did not earn enough, putting the savings into promoting the core brands. P&G's entry into the male grooming
market posed a further challenge to Unilever. Its Persil and Omo brands were already fighting a price war
with P&G's Ariel and Tide in the laundry sector.
Future Outlook

On January 28, 2005, Colgate-Palmolive (Colgate) announced that their fourth-quarter

earnings had fallen by 23%. Colgate was cutting about 4,440 jobs and closing a third of its
factories, reducing profits by 9 cents a share. Reuben Mark, the Chief Executive, planned to use
savings from the revamping exercise to increase advertising and protect Colgate's lead over
Crest, P&G's toothpaste brand. Colgate-Palmolive's toothpaste and Speed Stick deodorant
would be battling with P&G's Crest toothpaste and Gillette's Right Guard deodorant. Shares of
UK's Reckitt Benckiser and French pen and razor group Bic had moved up after P&G's Gillette
deal on speculation that Colgate-Palmolive could be interested in these companies. However,
the company announced it would not be engaging in any M&A activity for quite some time.
Analysts said that the company was too busy with current restructuring to make any
acquisition moves.
Some analysts felt that the dark merger `cloud' might have a silver lining for competitors.
Glenn MacDonald, Professor of Economics and Strategy at Washington University's Olin School
of Business in St. Louis said, "When industries consolidate, that typically leads to more profits.
Further, no merger ever goes as quickly or as smoothly as predicted and so competitors can
take advantage of the disorganization that happens during a merger." He added that
competitors could launch new products or strengthen their supply chain relationships during
this time to gain an edge.
Analysts feel that the consumer goods industry was ripe for consolidation. Many felt that a
P&G-Gillette combination could be a transformative deal for the industry because of Gillette's
growth potential. They also forecasted that this deal could lead to further consolidation in the
industry.
The costs of product innovation were quite high for razors, and some analysts feared that
consumers might be getting fed up with ever-increasing prices for razors. Gillette had admitted
in the past that it feared competition from low-cost rivals, particularly in its Duracell electric-
battery segment. As for the argument of synergies, Bethany McLean of Fortune Magazine
commented, "Personally, I think synergies are a lot like UFOs. Lots of people claim to have
seen them, but few can actually prove they exist." Table I: Company Comparison

P&G Gillette

Sales $51.4 bn $10.3 bnb

Profits $6.5 bn $2.3 bnb

Dividends $2.5 bn $0.7 bnc

R&D Spending $1.8 bn $0.2 bnc

Tide, Always,Bounty, Crest,

Ariel, Downy, Mach3,Gillette, Oral-
Leading Brands
Pampers, Pringles, Folgers, B,Duracell,Braun
Wella, Olay,Head & Shoulders

Employees 110,000 30,000

Table II: Comparison of Geographic Sales of P&G and Gillette
(%)

P&G (2003) Gillette (2003)

North America North America

Western Europe Western Europe

Northeast Asia Asia Pacific

Developing Geographies Africa/Middle East/Eastern Europe

Latin America
Source: www.forrester.com

Table III: Potential Products for Co-promotion

P&G Gillette

Crest Spin Brush Electric Toothbrushes Duracell Batteries

Noxzema Shave Creams and Gels Mach3 Turbo razors

Folgers and Millstone coffee brands Braun coffee makers

Crest toothpaste Oral B toothbrushes

Compiled from various sources

Reuters offers 5 Five Facts on P & G and Gillette merger. Those are listed below plus other interesting facts
about this huge merger.

The combined company will have more than $60 billion in annual revenues. Here are some key facts about
the two firms.

1. Cincinnati-based Procter & Gamble was established in 1837 and made its name selling soap and candles
to U.S. government soldiers during the civil war.
2. Boston-based Gillette spends around $600 million annually on advertising.
3. In May the razor-maker paid a reported 40 million pounds ($75.4 million) to sign international soccer star
David Beckham to a three-year deal as its global face.
4. Procter & Gamble employs a workforce of 110,000 worldwide and has a market capitalization of $141
billion. Gillette employs 29,400 employees worldwide and has a market capitalization of $45 billion.
5. Gillette's profit beat market expectations last October after Hurricane Ivan spurred the buying of Duracell
batteries. ($1=.5303 Pound)

Another blog post adds this:

"The Gillette and Proctor Gamble merger, now this merger makes a lot more sense to me. Gillette is the
number 1 in razor accessories and proctor gamble is number 1 in consumer products, a marriage of the best
in their respective industries. I've always liked a good horizontal expansion, now the newly formed company
will have products being used in most of the houses in the US (and that's probably an understatement). Those
who shave probably use Gillette, those who shower use pantene pro-v or head and shoulders or the other
products from P & G. I can't wait to see how this will develop in the future, now it's very important for these
two companies to take the process slowly, there's no hurry in the integration process. One can only imagine
how ecstatic Warren Buffett is, he will get a share of the most popular razors,toothpaste, shampoo, soap and
detergent brand in the US.

Mr. Buffett owns about 33% of berkshire hathaway which in part owns 10% of gillette. And at the end of the
merger, he would be receiving 93million shares of the new company, he likes whole numbers so he'll buy
stocks until he gets 100million shares of the new company that would have about 2.5 billion shares. Which
would be about 4% of a company that will have revenues of 60 billion dollars a year."

The Conglomerate blog adds their take on the merger ...

"In case you have been in a no-media zone this morning, Procter & Gamble has announced that it will
acquire Gillette Company. The WSJ article is here.

According to the terms of the deal, Gillette shareholders will receive .975 shares of P&G for each share of
Gillette that they hold. According to the press release, P&G plans to repurchase approximately 40% of that
newly issued stock (valued at between $18 and $22 billion) within the next 12-18 months.

Of course, Warren Buffet's Berkshire Hathaway stands to benefit the most from this merger, owning 96
million shares of Gillette and announcing that it will buy more in anticipation of the merger.

The merger of the two companies will create "the world's largest consumer products conglomerate." Both
companies are strong, diversified companies, so one wonders what uncaptured synergies there could be here.

The WSJ article points out that P&G is adept at taking innovations from one product and transferring it to
another product, so there may be opportunities to improve existing Gillette products. In addition, the
companies are stating that the merger will give them more negotiating power with the most powerful buyer of
consumer products -- Wal Mart. I am sure that's true, but I can't help but notice that other closely related
companies are stating that they have to merge to compete with Wal Mart (Sears & KMart).

This merger will face some regulatory scrutiny because many of their products overlap (Crest/Oral-B;
Secret/SoftnDri; Old Spice/Right Guard. When technology companies merge and have to explain reasons why
to the DOJ/FTC, they usually throw in the rationale that they have to merge to compete with Microsoft."