CASE STUDY

ACQUISITION OF GILLETTE BY P&G

(2004-2005)

Submitted by:

Sajib Kar (011202002)

Abhishek Chatterjee(011202018)
Introduction:

CINCINNATI, AND BOSTON, Jan. 28, 2005 /PRNewswire-FirstCall/ -- The Procter & Gamble
Company (NYSE: PG) announced it has signed a deal to acquire 100% of The Gillette Company
(NYSE: G). Gillette, founded in 1901 and headquartered in Boston, Mass., markets a number of
category-leading consumer products such as Gillette(R) razors and blades including the
Mach3(R) and Venus(R) brands, Duracell(R) CopperTop(R) batteries, Oral-B(R) manual and
power toothbrushes, and Braun shavers and small appliances. The transaction is valued at
approximately $57 billion (USD) making it the largest acquisition in P&G history.
History of proctor & gamble

In the year 1837, William Procter and James Gamble create a new company: Procter&Gamble.
In this year Procter&Gamble starts to sell only soap and candles. This are first objects which
P&C sells.After 22 years, P&C employs 80 employees and made a turnover of $ 1 million.In the
year 1890 P&C is selling more than 30 different types of soap and William A. Procter assumes
the leadership of the enterprise.
1907, the son of William A. Procter, William Cooper Procter became the new chief of the
company because his father died. 1930, William C. Procter gives the business into another
hand.Richard R. Deupree will be, now, the new chairman of P&C. In the year 1931, Neil
McElroy, the Company’s Promotion Department Manager, gives out a new marketing strategy.
This strategy should specialize every brand in a different way. The brand management of P&C
was born. In the years from 1934 until 1937, the last member of the origin family, William C.
Procter died. The company reinforce his engagement in the Far East with an acquisition of the
Philippine Manufacturing Company.
1937, the company celebrates his 100th birthday and the sales reached about $ 230 million.Neil
H. McElroy will be the next leader of P&C in the 1948. In the Sixties, the company make some
more big acquisition to continue the growth of the company. 1957, Howard J. Morgens is the
successor of Mr. McElroy. The Seventies are the years of the big expansion. The company
creates sub-companies for example in Germany, Belgium, the Middle East, Japan and other big
companies.
1974, Ed Harness will be the next chief-executive-officer of P&C. The Eighties are also exciting.
The company reached a turnover of $10 billion, another CEO will get the reins for the company
and the company makes new acquisitions, for example:
The acquisition of Norwich Eaton Pharmaceutics. 1990, again a new chief for the company:
Edwin L. Artzt became the new boss of P&C. In the year 1993, the company sales reached $ 30
billion. It is the first time for the company, that 50% of the sales came from outside the U.S. John
E. Pepper will be the ninth chairman of the company and Durk. I. Jager became the first Chief
Operating Officer in the year 1995. In 1999 Jager will be the next chairman of the company. In
the Millennium P&C gets again a new chairman, A.G. Lafley is the next President and Chief
Executive.
2002, P&C celebrates the 165th anniversary of the company. P&C has $ 12 billion brands in its
portfolio, this is representing more of the half of the company sales.

History of Gillette:

In the year 1901 the Gillette Company is founded in Boston, Massachusetts.

1904 King C Gillette receives the US patent for razor with replaceable blade. 1905 is the first
successful year for the company, because Gillette sold 90.000 razors and 12 million blades. After
the year 1907 Gillette Blades will be to have in Germany.
In the year 1967 the BROWN GmbH, an important manufacturer of drying electric shavers and
electrical small devices, will be part of the Gillette Company. 1984 Gillette takes another big
partner in to the company. “ORAL B”, the company of toothbrushes and mouth care.
In the year 1996 Gillette takes over “DURACELL”, the company of big batteries. 1998 is a great
year for Gillette. Gillette has created a new shaving system: the Gillette MACH3- Shaving-
System. 2001, Gillette has got its 100.Birthday. The Company exists now 100 years and has
made in this 100 years a huge success.
In the year 2004/2005 there are some phrases about a big merger with another big company.

The companies at a glance:

P&G-2003/04 Gillette-2003/04
Sales $51.4 billion $10.3 billion est
Earnings $6.5 billion $2.3 billion est
Dividends $2.46 $0.65
R&D expenditures $1.8 billion $202 million(in 2003)

Leading Brands Tide,always,Lams,Pantene, Mach3,Gillette,Oral B,

Olay,Head&shoulders,ariel Duracell,Braun.
,
Downy,pampers etc.
Brands/sales >$1 billion 16 5

Number of employees 110000 30000

Manufacturing 106 in 41 countries 31 plants in 14 countries

R&D centers 20 in 9 countries 3-Germany, UK, USA.

Chief executive A.G.Lafley, Chairman, James M.kilts, chairman,

president,chief executive. president, CEO.
Continuing of both companies:

01.02.2005 Procter and Gamble is nearing a deal to purchase Gillette in a stock swap value at
about $ 55 billion.
Under the terms of deal, P&G is offered 0.975 P&G share for each share of Gillette outstanding.
That valued Gillette shares at $ 53,94 based on P&G’s Thusrday closing price of $ 55,32, the
Journal said. The offer represents a 17,6% premium to Gillette’s closing price of $ 45,85.

The Deal:

On January, 28, 2005, The Procter & Gamble Company announced it had signed a deal to
acquire 100% of The Gillette Company, founded in 1901 and headquartered in Boston. The
transaction was valued at approximately $57 billion (USD) making it the largest acquisition in
P&G history (Webpronews, 2005). Global Gillette, a business unit of Procter & Gamble, was the
successor of The Gillette Company. On October 1, 2005, Procter & Gamble finalized its
purchase of The Gillette Company. As a result of this merger, the Gillette Company no longer
exists. Its last day of market trading - symbol G on the New York Stock Exchange - was
September 30, 2005. The merger created the world's largest personal care and household
products company. 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. However this did
not result in a direct merger between Gillette India and P & G India, although it was decided to
restructure the operations of Gillette India in line with the policies and practices of P&G
(Business mapsofindia, 2008). Finally, on 10th June, 2006, Gillette India was acquired by P & G.

Approval are require to complete the deal:

Both companies have signed the deal.Shareholder of both the companies ask to approve the
transaction;this will occur in mid-May.The deal is subject to all regulatory and government
approval in various markets including European nations and U.S.
Terms of the deal:

Under terms of the agreement, unanimously approved by the board of directors of both
companies on January 27, P&G has agreed to issue 0.975 shares of its common stock for each
share of Gillette common stock. Based on the closing share price of P&G and Gillette stock on
January 27, 2005, this represents an 18% premium to Gillette shareholders.

P&G will acquire all of Gillette's business, including manufacturing, technical and other
facilities. The transaction, which is subject to certain conditions including approval by Gillette's
and P&G's shareholders and regulatory clearance, is expected to close in fall 2005.

In addition, P&G and its subsidiaries plan to buy back $18 to $22 billion of P&G's common
stock during the next 12 to 18 months. Over time, this will essentially result in a total financial
impact on the company as if the deal were structured with approximately 60% stock and 40%
cash.

Potential regulatory/anti-trust barrier to deal& brand might require

to be sold:

The company will work closely with regulatory to review deal.As few produt overlap each other
so the issue will be solved.The company operate in a highly dynamic and highly competitive
marketplace.The company have good track record of working with regulators in competitive
consumer marketplace.
Strategy analysis:

P&G works in 5 main areas: House, Personal Beauty, Baby, Health & Wellness and Pet
Gillette works in 2 Gillette’s traditional sectors: Personal beauty with the Gillette Range and
Health & Wellness with the Oral B Toothbrushes brand.
Gillette is also working in the batteries sector with the Duracel brand.

Gillette product portfolio:

All Gillette’s brands are strong brands which add value to the P&G’s portfolio. We can
suppose that most of Gillette's references was be conserved.

P&G product portfolio:

2 of the 5 P&G sectors will be impacted:

• Personal Beauty: P&G and Gillette have exactly the same products into the Men’s
deodorants segment. The Gillette notoriety is so high on this segment that P&G may suppress
1/3 of its Men deodorants activity.

• Health & Wellness: P&G and Gillette sell exactly the same products for Childs on the
Tooth Brushes and the Toothpaste market. Each One pay big licenses (Spiderman & Disney)
for a product. They can do big economies with the suppression of one of it.

Synergy effect & risk analysis:

· Similar Brands Cutting in the Child toothpaste and in the Men’s deodorant sector.
· Suppression of Similar jobs in the company
· The worldwide brand Gillette’s knowledge.

Opportunity for both the companies:

Opportunity for Gillette:

• The new shareholder will enable Gillette to develop their brands with more resources.
• They will have benefits from the P&G marketing structure.

Opportunity for P&G:

• The most important benefits for the P&G group are

• More Bargain power:

• The biggest group of its sector: No one can deal without them
• 2 news for the top 100 brands: Gillette & Duracell: Retailers can not afford them not to sell
its goods.
• A higher share in 2 department and a new department: the batteries.
• Economy of scales: Job cuttings into central functions, some expensive segments and products
will be suppressed, R&D, marketing and communications expenses will be reduced.
Bargain Power and Economy of Scale are the most important factors about a merger in the
goods industry.

Financial back ground of the deal:

The transaction is valued at approximately $57 billion (USD) based on closing NYSE stock
prices of Jan. 27, 2005.

P&G expects to achieve revenue and cost synergies at a present value of about $14 to $16 billion
(USD), mainly through the scale of the combined company applied to leveraging P&G's unique
organization structure, removing duplicate costs and driving further efficiencies. P&G said it
anticipates enrollment reductions of approximately 6,000 employees, or about four percent of the
combined work force of 140,000. Most of these reductions should come from eliminating
management overlaps and consolidation of business support functions.

"We will field the best team possible to lead these new businesses, drawing from both Gillette
and P&G management," said Lafley. Specifics related to employee separations will be
announced in due course. The company plans to maintain a strong presence in the Boston area.
Financial analysis at 2003/04 of both the companies:

Profitability

Profitability is the core measure for a firm in order to determine its past and future performance.
So in this first section I will try to determine how well both companies have performed in terms
of profitability. First I let us consider the ROE. Gillette has had in the four year period averaged
an ROE 54,5%. Compared to the average of American firms (that stands at 12%), this is at first
sight a very impressive figure. Initially that means that they have compared to other companies
rewarded their shareholders with more profits that other companies, and that revenues have been
much higher. However how did Gillette arrive at this number? They might have used a leverage
effect and put lots of debt in the company so that ceteris paribus the ratio would have increased
or they might have used some accounting cosmetics that would have increased profits. Compared
to other companies Gillette has actually had quite a high leverage of about on average 3.6
debt/equity. This becomes especially significant as P&G which has a significantly lower
leverage also has got a lower ROE. On average Gillette has had 1,5 times the debt to equity ratio
than P&G. Also the share of equity in the balance sheet (or the proportion of total assets) has
been 1,5 times higher for P&G. Taking account of this P&G has averaged an ROE of about 47%
over this period. Compared to the average this is quite an impressive number. As ROE is pretty
similar next thing to look at is operating profit margin. It takes only into account the profit that
has been generated from operations that means there is no influence of non – operating factors.
Here Gillette has had an average operating profit margin of 21,3% whereas P&G was 16,5%. A
very important strategic issue for both companies is advertising expenses. As they both produce
consumer goods not industrial goods this will naturally be a high percentage of sales. Examining
this figure more closely is important as it shows on average how much $ of advertising was
necessary to generate 1$ of sales. Here the both companies have roughly the same percentage,
P&G at 9,6% and Gillette at 8,7%. Concluding it can be said that Gillette has been slightly more
profitable over the examined period.

Capital management
Here we will look at first at accounts receivable turnover. This ratio indicates how much money
one receivable is worth on average. The higher this ratio, the shorter the money collecting period.
This has also a significant impact on the cash flow.There is a significant difference between the
two. Gillette stands at 8,8, P&G at 13,3, so P&G is more efficient. However as the below
diagram shows Gillette has become more efficient doing this. The next ratio to look at is
inventory turnover. This is an indication how often company turns over its inventory.
P&G has a value of 6,3 whereas Gillette only achieves 3,5. Again P&G is more efficient. The
next area to look at is the long term performance of capital. The net long term asset turnover.
This measure evaluates how good a company manages its long term assets. The higher the ratio
the more efficient the use of it. For P&G the ratio stands at 1,5 for Gillette at 1,7 suggesting no
big differences between the 2 companies.

Leverage analysis

Leverage Analysis takes account mostly of how well a company has been able to meet its
obligations, and how it could finance them if it would have to. For the short run the obvious
measure to look at are the current ratio as well as the quick ratio. Here I will use the quick ratio
as it is a more “strict” approach of measuring a companies short term ability of paying back debt.
For example it doesn’t include deferred income tax as this is a really unsafe asset, often
influenced by optimizing the firms tax payments. Gillette has an ratio of 57% whereas P&G has
50%. This is somewhat surprising given the fact that Gillette overall has got a much higher
debt/equity ratio. This might be a strategic issue as Gillette wants to increase their leverage by
taking on a lot of long term debt whereas they want to be “save” paying off their short term
liabilities. The second part of debt is to look at the long term debt. As stated earlier Gillette has
had on average 1,5 more debt as P&G, which is mainly composed of long term debt. The next
ratio to look at is the ability of the company to cover interest payments out of the cash flow
(interest coverage ratio). Gillette´s average stands at 49 whereas P&G stands at 17. This number
is suggesting that Gillette is having a very strong cash flow, given its higher leverage.
How did the deal affect the employees:

Production reduction of combined company estimated at approximately 6,000 employees.This is

about 6% of combined companies workforce of 140,000.Reduction will occur across the
company as we look for the way to integrate headquarters and business units operation;it is
premature to speculate on particular impacts. The management of combined company will make
every effort to retain best employees from both the companies.

Conclusion:

This combination of two best-in-class consumer products companies creates a stronger brand
portfolio, opportunities for even more innovation, faster sales growth and cost savings synergies.
As a result, P&G has raised its annual sales growth target from 4%-6% to 5%-7%. Also, P&G
stated the combination provides future upside potential to its double-digit annual earnings growth
target.