Synergy is a stated motive in many mergers and

acquisitions. If synergy is perceived to exist, the market

combined firm, after a merger announcement, should
be greater
value of the than the sum of the market values of the
bidding and target firms(standalone), prior to that
same announcement.

V(AB) > V(A) + V(B)

Where
V
: (AB) = Value of a firm created by combining A and
B V(A) = Value of firm A, operating independently
V(B) = Value of firm B, operating
independently
Popular
1+ 1 >
definition:
2
Roundabout
If am I willing to pay 6 for a business
definition:
market-valued at 5 there has to be the
synergy justifying the same.

More technical
Synergy is ability of merged company to
definition:
generate higher shareholders wealth
than the standalone entities.
Increased revenues may result
Increased market (monopoly) power
from:

 Better or more efficient marketing
efforts
 Strategic benefits such as entry into new

markets Decreased operating costs may

 Economies of scale
arise from:
 Economies of scope
 Complementary resources

 Elimination of operating or management

inefficiencies Increased growth rate
Manufacturing Operations
synergy
synergy

Marketing
synergy

Financial
Tax synergy
synergy
1. • First, we value the firms involved in the merger
independently, by discounting expected cash flows
to each firm at the weighted average cost of capital
for that firm.

2. • Second, we estimate the value of the combined

firm, with no synergy, by adding the values obtained
for each firm in the first step.

3. • Third, we build in the effects of synergy into

expected growth rates and cash flows and we
revalue the combined firm with synergy.

The difference between the value of the combined firm

with synergy and the value of the combined firm
withoutsynergy provides a value for
synergy.
 MNC catering to the consumer goods
industry.
 Established in 1837 by William Procter & James
Gamble.
 Fortune 500
companies
 5th most admirable
company

Headquartered in Downtown Cincinnati, OHIO ,USA
 Serve more than 180 countries. Operations in 80


countries.
Four billion times a day, P&G brands touch the lives of people
around the world

Some of their familiar & well known brands are

:  Covergirl, Dawn,Ariel,Herbal essences, Head & shoulders ,
Olay, Wella ,Pringles, Pampers, D & G fragrances…and the list
goes on…!
 The original Gillette Company was founded by King
camp Gillette in 1895 as a safety razor manufacturer.

 Based in Boston , Massachusetts

,USA
 A leading global supplier of products under
various brands, which was merged into P&G in
2005.
 In addition to Gillette, the
marketed
company under 
Braun, Duracell and Oral-B, among others, have
also been maintained by P&G today.

 Today, Gillette is a brand of Procter & Gamble

currently used for safety razors , among other
personal care products.
 In January 2005 P&G announced an
of Gillette, forming the largest consumer goods
acquisition
company and placing Unilever into second place.
 This added brands such as
razors,
Gillette Duracell, Braun, and Oral-B to their
 The acquisition was approved by the European Union
stable.
and the Federal Trade Commission, with conditions to a
spinoff of certain overlapping brands.

 On January 28, 2005, Cincinnati-based P&G announced

its investment deal to acquire Boston-based Gillette for
$57
billion.
 According to the deal, P&G agreed to pay 0.975 for each
share of Gillette.
 The annual sales of the combined
entity would be $60.7 billion. (82.6)

 After its purchase of Gillette, P&G

would have 21 billion-dollar brands-
sales with a market capitalization of
$200billion.(24)

 P&G agreed to pay Gillette 40% in

cash and the rest 60% in stock.
 On October 1, 2005, Procter & Gamble
finalized its merger with The Gillette Company.

 The merger created the world's largest personal

care and household products company.

 The Gillette Company's assets were

incorporated
initially into a P&G unit known internally
"Global
as Gillette". In July 2007, Global Gillette was
dissolved and incorporated into Procter & Gamble's
other two main divisions, Procter & Gamble
Beauty & Grooming and Procter & Gamble
Household Care. Gillette's brands and products
were divided between the two accordingly.
 Boy meets girl hook up! (Wharton
analysts).
The wedding of these two successful firms also has a
marketing rationale.

P & G 5.5 billion

$Gillette 1 billion $
Will give the combined firm more power
negotiate
to advantageous deals with media
companies.
The deal would give the company even more control
over shelf space at the nation's retailers and grocers .

The combined firm will be able to grow faster than

separately, with P&G opening doors for Gillette in markets
such as China and Japan while Gillette bringing P&G some
product segments that are growing faster than the company's
overall current portfolio of products.
 A marriage made in heaven—and in the
bathroom! (The economist).

 Whereas cultural differences have wrecked many past

mergers, especially cross-border ones, such problems
are less likely in this case, given the relative proximity
of the two firms’ headquarters.

 "Both companies are focused on the consumer

and continually trying to make improvements.“
(overcoming managerial inefficiencies)

 Gillette may be able to teach P&G about

marketing products with a recurring revenue
stream .
Year EBIT(1-t) Reinvestme FCFF TV PV factor
nt @7.03%
1 7632 (3053) 4579 4278
2 8201 (3280) 4920 4294
3 8812 (3525) 5287 4312
4 9469 (3787) 5681 4329
5 10174 (4070) 6105 4346
Terminal 10607 (6412) 4194 4194/ 1,07,413
(0.0703-0.0425)
= 1,50,864

Value of P & G 1,28,972

Year EBIT(1-t) Reinvestme FCFF TV PV factor
nt @7.39%
1 1859 (929) 929 865
2 2010 (1005) 1005 871
3 2173 (1087) 1087 877
4 2350 (1175) 1175 883
5 2541 (1270) 1270 889
Terminal 2649 (1523) 1125 1125/ 25085
(0.0739-0.0425)
= 35,828

Value of 29,470
Gillette
The value of the combined firm (P&G + Gillette), with
no synergy, should be the sum of the values of the
firms valued independently. Therefore , add the
value of P&G to the value of Gillette to arrive at
the value of the combined firm:

Value of P&G = $ 1,28,972

Value of Gillette = $ 29,470
million
Value
millionof combined firm = $ 158,442
million
This would be the value of the combined firm in
the absence of synergy.
Year EBIT(1-t) Reinvestmen FCFF TV PV factor
t @7.10%
1 9670 (4056) 5613 5240
2 10445 (4386) 6069 5291
3 11305 (4742) 6563 5342
4 12223 (5128) 7096 5393
5 13216 (5544) 7672 5444
Terminal 13216 (7704) 5510 5510/ 1,37,202
(0.0710-0.0425)
= 1,93,333

Value of P & G 1,63,912

(with
synergy)
Value of combined firm (WITH synergy) = $ millio
n
1,63,912
Value of combined firm (with NO synergy) = millio
n
$1,58,442
Value of Synergy = $ 5,490
million
 The combined firm will achieve
economies of scale, allowing it to
increase its current after-tax operating
margin.
 A new and beneficial cost of capital for the
firm
= 7.10% (7.03 P & G AND 7.39
Gillette).
 As a result, the growth rate over the
first 5 years will be
=8.02% (7.45 P & G AND 8.13
Gillette)
 The stadium was originally known as CMGI Field
before the naming rights were bought by Gillette
after the "dot-com" bust. Although Gillette has
since been acquired by Procter & Gamble, the
stadium retains the Gillette name because P&G
has continued to use the Gillette brand name
and because the Gillette company was founded
in the Boston area.

 203
1
 Biased Evaluation
Process
 Managerial
Hubris
 Failure to plan for
synergy
 http://money.cnn.com/2005/01/28/news/fortune500/pg_gillette
/
 people.stern.nyu.edu/adamodar/pdfiles/papers/synergy.p
df
 http://knowledge.wharton.upenn.edu/article.cfm?articleid=113
5
 nb.vse.cz/~pichanic/cesp363/syner
gy