INTRODUCTION

According to Brigham and Ehrhardt (2005:845) there are five “merger waves” that
respectively occurred in the US in the late 1980s, 1920s, 1960s, 1980s and recently the fifth
wave “which involves strategic alliances designed to enable firms to compete better in the
global economy, is in progress today”. Discussing the following merger case of the two
companies Procter & Gamble (P&G) and Gillette is going to support to answer questions
what are the rationales behind this merger decisions, how P&G could achieve its competitive
advantages and success after the merger. The main article which will be discussed in this
essay is:

Barker, R. 2005, P&G: Razing Rivals with Gillette?, Businessweek,

http://www.businessweek.com/bwdaily/dnflash/jan2005/nf20050128_4746.htm [05 Mar.
2011]

In this essay, some more articles are used to do discussion and analysis; details of the articles
are given in the bibliography.

RATIONALES FOR THE PROCTER & GAMBLE – GILLETTE MERGER

Challenges in fast moving consumer goods (FMCG) industry

Considering business environment of the consumer goods industry during the early 2000s,
there were many reasons that contributed directly to this merging decision of both P&G and
Gillette.

As stated by Ruchi Chaturvedi N & Pradip Sinha, Associate Consultant ICMR (IBS Center
for Management Research) this industry started to face with many issues by the end of 1980s.
(Cited http://www.icmrindia.org/free%20resources/articles/Gillette%20merger7.htm, [5
Mar.2011]):

- Slow sales growth after the golden period 1950-1980 with high and continuous
growth. During four decades 1950s – 1980s, the FMCG grew rapidly thanks to the
development of world economy as well as the population growth after the world war
two.
- The stiff competition from the key rivals such as Unilever, Colgate - Palmolive,
Kimberly Clack... also led to the low profit margin for the whole industry. Actually,
all these key rivals had merged and acquired many firms in the industry to enhance
their competitive advantages in competition. Unilever was famous for buying many

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 local brands/companies in developing countries. It was used as a good way to increase
market penetration and market power.
- Competition also comes from the emergence and development of private- label brands
which definitely possesses low price advantage. This challenge increased the product
diversification, emerged more distribution channels, diversified customers’ choices
and consumer types. It can be seen as a significant threat for the giants such as P&G
and Gillette.
- According to the recent research, in fast moving goods industry customers have
become more price-conscious and less brand-conscious during this decade.
- Bargaining power of giant retailers such as Wal–Mart, Carrefour, and Tesco also
lowered the profit margin of the industry. As stated by Andrew Ross Sorkin and Steve
Lohr, two economic analysts of the New York Times, both Procter & Gamble and
Gillette were pressured by giant retailers, especially on the bargain position. (Cited
http://www.nytimes.com/2005/01/28/business/28cnd-procter.html [5 Mar. 2011]).

Analysts believed that the stiff competition from rivals and pressures from giant retailers
contributed significantly to the merging decision of the two companies. Therefore, it
could be called that this marriage as a force rather than a choice.

Significant consistencies and similarities:

- First of all, both firms have more than a century of development history, similar
organizational cultures and values (American management style), possessing billions
of dollar brands and pioneering consumer goods marketing initiatives.
- Next, these two firms also had similar issues of low sales and operating profits, and
both companies had overcome these problems with similar approached strategies
during the year around 2000. Both P&G and Gillette focused on strong brands,
aggressive marketing and productivity in operation.
- Finally, analysts evaluated highly the role the two CEO of both firms, particularly
with the contribution of P&G CEO Lafley in the merger. This could be seen as a big
success of Lafley who had led successfully P&G during its difficult period. Right
after joined the company from the year 2000, Lafley changed the firm’s focus from
traditional household brands to its fast growing health and beauty brands. Since
Lafley took the role of CEO, it was the third time P&G acquired others, the first two
times happened in 2001 and 2003 respectively by buying two hair care firms Clairol
for $4.9 billion and Wella AG for $7 billion. This time, the two companies had nine
months to talk about the merger, and finally the announcement of this merger had

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 been made in 27th Jan 2005. After that, James M. Kilts, Chief Executive Officer of
Gillette became the vice chairman of P&G in the duty of leading for the integration.

SUCCESSES OF THE MERGER

Both these two companies emphasized enormous synergies that the combined firm would
definitely possess as following statements:

“This combination of two best-in-class companies creates a stronger brand portfolio,

opportunities for even more innovation, faster sales growth, and cost savings.”

- AG Lafley, Chief Executive Officer, P&G

(Cited http://www.icmrindia.org/casestudies/catalogue/business%20strategy/BSTR159.htm [5
Mar 2011])

Detailing for the above statement, AG Lafley added:

“We believe we can bring these companies together and create a juggernaut”. “The more
scale a company can create, the more opportunities there are to grow margins and invest in
brand innovation.” (Cited http://www.msnbc.msn.com/id/6878219/ns/business-us_business [5
Mar.2011])

In other words, James M. Kilts, Chief Executive Officer, Gillette Co said:

“I’m a great believer in scale,” “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.” (Cited http://www.nytimes.com/2005/01/28/business/28cnd-
procter.html [5 Mar. 2011])

These two companies’ leaders emphasized the value of economy of scale, sales growth,
stronger brands portfolio, brand innovation, sustainable growth, cost saving and margin
improvement in relation to this merger.

Establishing a “juggernaut” supported the combined company to increase sales, be more

effective in terms of distribution and trade marketing. This transaction supported P&G
maintained the position of the largest FMCG company in the world with annual sales over
$61 billion (P&G: $51 billion and Gillette $10 billion in sales year 2004). Looking at market
share, P&G and Gillette are different in geographic especially in developing economies such

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as China, India, Southeast Asia and Eastern Europe. Therefore the merger could support to
expand the availability of the two companies’ products in the worldwide market.

The two firms could share and maximize the effectiveness of marketing resources. In the
past, P&G was famous for a consumer products giant that focused mainly to women
customers with a list of leading brands: Tide, Always, Bounty, Crest, Ariel, Downy,
Pampers, Pringles, Folgers, Wella, Olay, Head & Shoulders.... After buying Gillette, it could
have a larger brand portfolio with more men’s products. Actually, it possesses 21 million-
dollar brands portfolio including some key of Gillette’s brands: Mach3, Gillette, Oral-B,
Duracell, and Braun. Possessing this new brands portfolio, P&G can merchandise its products
in to the male products shelves where it had never been before. It means that the merger
could gain advantages from products diversification, and current distribution system. It
means P&G and Gillette found out the consistency in this merger which helps these two firms
to maximize the productivity of whole marketing channel: distribution, merchandising,
advertising, and even in logistics management.

Gillette possessed many assets that P&G wanted to have. First of all, Gillette was holding a
very strong brands portfolio. Before merging, Gillette was holding 72% of the US market for
blades and razors which amounted 44% of its total sales and 68% of operating profits.
Therefore, by acquired the razor maker, P&G would have more chances to develop sales and
improve revenue and profit. Gillette was also stronger in electric brush market, therefore
buying Gillette, P&G could support for the development of its Crest oral – care, a strong
brand in low price electric toothbrush segment. This was shown in the speech of Lafley:
“Gillette is very competitive, probably the best in the world right now in power brushes”.
Analysts said that it helped P&G put more pressure on the second rival Colgate-Palmolive.
Second, P&G was really interested in Gillette’s battery technology with its famous Duracell
brand. P&G could develop this technology for its batteries and electric brush lines. The last
one is that Gillette’s products are very different from other consumer products outfits. Gillette
was really an expert in both brand marketing and differentiation. During the difficult period
of FMCG industry in the years around 2000, Gillette till achieved big successes in moving
pricing up and gaining market share. For illustrating, only one year after the launch, Gillette
MP3Power battery razor possessed 35% US razor market value. It is worth to note because
this razor model is 50% more expensive than the previous one. Therefore, merging with
Gillette could support Lafley’s strategy to develop P&G’s businesses achieving higher profit
margins in comparison with the average margin of the industry. This merger could help P&G
to offset the downward margin pressure when it was increasing dramatically its market
penetration in developing geographies such as China, Southeast and South Asia. This
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downward margin pressure is given a reason that because P&G must launch lower price
products to compete with cheaper price ones from Unilever, Colgate – Palmolive, Kimberly
Clack as well as local products.

According to Advertising Age Magazine, in 2004 Gillette spent about $600 million on
marketing and P&G had paid $5.5 billion on advertising that was more than any companies.
P&G also informed that the budget used for R&D for Procter & Gamble and Gillette was
respectively $1.8 billion (2004) and $0.2 billion (2003) and the total value of these kinds of
cost would be deducted after the merger. In addition, the two companies forecasted that
operating margins would reach 25% by 2015, compared to P&G’s figure of 19.1% in 2003.

Moreover, the executives of the two firms expected to gain from $14 to $16 billion in annual
benefit that would be contributed by the gains from the higher bargain position with giant
retailers, media companies, sales growth opportunities with higher margin portfolios, savings
from R&D and cost savings from eliminating 6,000 jobs - about 4% the workforce of
140,000 worldwide P&G’s employees and 29,600 Gillette’s employees.

In conclusion, the merger has supported P&G to be more effective in terms of maximizing
the effectiveness and productiveness of marketing strategies: better/consistent brands
portfolio, increasing products availability, moving pricing up and maintaining high margin in
price policy and reaching competitive advantages in distribution system. The merger has help
P&G and Gillette to gain more market power as well as global market shares, enhanced the
largest position in FMCG industry. It has also improved bargaining power in the deal with
giant retailers, suppliers. P&G would also create a high margin due to a higher profit
products portfolio as well as cost saving from jobs cutting and the combination of the two
companies’ business support functions.

KEY BUSINESS OUTCOMES AFTER THE MERGER

In 2010 Procter & Gamble is the only company presented in the Top 5 for six consecutive
years on the Dow Jones Sustainability Index 2000 – 2010. It also has been ranked 13 th of the
Global 100 Most Sustainable Corporation in the World.

Despite a lower increase in the latest period, the company also had a significant growth
46.7% in the value of net earnings from $8.684 billion (2006) to $12.736 billion (2010). It
was worth for investors/shareholders to note that the combined firm has been delivering very
good results after the merger when dividends per common share increased sharply during last

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5 consecutive years with an annual rise at 11.3% which was much higher than the average
results of the period 2001-2005 with 9.43%.

CONCLUSION
$57 billion for the deal of acquisition between Procter & Gamble and Gillette has been the
biggest deal in history of fast moving consumer goods industry. It boosted the merger’s
annual sales $61 billion that supported P&G to be the biggest FMCG Company in the world,
which possesses 21 million-dollar brands portfolio with the capitalization about $200 billion.
As a result, the combined company has been more influential for the consumer products
industry and changed the forces in the market. Therefore, it has had a better bargain position
in the deals to gain higher margins. The advantages of scale and the combination of these two
companies’ business support functions directly contributed to reduce input costs, to form a
higher margin products portfolio and finally to maximize profit, the value of the new
company as well as the value of its shares. Analysts also believed that this successful
transaction can lead to the new wave of mergers and acquisitions in this industry in the near
future.

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BIBLIOGRAPHY
1. Barker, R. 2005, P&G: Razing Rivals with Gillette?, Businessweek,
http://www.businessweek.com/bwdaily/dnflash/jan2005/nf20050128_4746.htm [5
Mar 2011]
2. Ireland, R. et al. (2011): The Management of Strategy Concepts and Cases, 9th edition,
Ohio: South-Western
3. Brigham and Ehrhardt (2005): Financial Management: Theory and Practice, 11th
edition, Ohio: South-Western
4. IBS Center for Management Research (2010): The Procter & Gamble (P&G)-Gillette
Merger, http://www.icmrindia.org/casestudies/catalogue/business
%20strategy/BSTR159.htm [5 Mar. 2011]
5. Isidore, C. 2005, P&G to buy Gillette for $57B, CNN,
http://money.cnn.com/2005/01/28/news/fortune500/pg_gillette/ [5 Mar.2011]
6. McClure, B. 2010, Mergers and Acquisitions, Investopedia,
http://www.investopedia.com/university/mergers/ [5 Nov.2011]
7. Pitman, S. 2006, Gillette merger spells boost for P&G,
http://www.cosmeticsdesign.com/Financial/Gillette-merger-spells-boost-for-P-G. [5
Mar. 2011]
8. Procter & Gamble Co (2010): 2010 Anual Report,
http://annualreport.pg.com/annualreport2010/?
utm_source=pgcom&utm_medium=ir&utm_campaign=ar2010 [5 Mar. 2011]
9. Procter & Gamble Co (2010): Financial Highlights,
http://www.pg.com/en_US/investors/financial_reporting/financial_highlights.shtml [5
Mar. 2011]
10. Procter & Gamble Co (2010): Information on Exchange of Gillette Shares,
http://www.pg.com/en_US/investors/investing_in_pg/gillette_shareholders.shtml [5
Mar. 2011]
11. Ruchi Chaturvedi N & Pradip Sinha. 2005, The P&G-Gillette Merger: A Dream
Deal?, ICMR (IBS Center for Management Research), http://www.icmrindia.org/free
%20resources/articles/Gillette%20merger7.htm, [5 Mar.2011]
12. Sorkin, R. & Lohr, S. 2005, Procter Reaches $57 Billion Deal to Buy Gillette, New
York Times, http://www.nytimes.com/2005/01/28/business/28cnd-procter.html [5
Mar. 2011]
13. The Associated Press.2005, Procter & Gamble to buy Gillette for $57 billion, The
Associated Press, http://www.msnbc.msn.com/id/6878219/ns/business-us_business [5
Mar.2011]
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14. The Barker Portfolio. 2005, P&G's $57 Billion Bargain, Businessweek,
http://www.businessweek.com/magazine/content/05_30/b3944031_mz026.htm[5
Mar.2011]
15. Weston, J.2005, Procter & Gamble-Gillette Merger,
http://www.anderson.ucla.edu/faculty/john.weston/papers/PG-Gillette.doc. [5 Mar
2011]

APPENDIXES