Acquisition of -- The Gillette Company by P & G

2. Synergy is a stated motive in many mergers and acquisitions.
If synergy is perceived to exist, the market value of the
combined firm, after a merger announcement, should be
greater 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

3. Popular definition:
1+1>2
Roundabout definition:
If am I willing to pay 6 for a business
market-valued at 5 there has to be the synergy
justifying the same.
More technical definition:
Synergy is ability of merged company to
generate higher shareholders wealth than the
standalone entities.

4. Increased revenues may result from:
 Increased market (monopoly) power
 Better or more efficient marketing efforts
 Strategic benefits such as entry into new markets
Decreased operating costs may arise from:
 Economies of scale
 Economies of scope
 Complementary resources
 Elimination of operating or management inefficiencies
Increased growth rate

5. Manufacturing Operations
synergy
synergy
Marketing
synergy
Financial
Tax synergy
synergy

6. 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 without
synergy provides a value for synergy.

8.  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…!

9.  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 company
marketed 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.

10.  In January 2005 P&G announced an acquisition
of Gillette, forming the largest consumer goods company
and placing Unilever into second place.
 This added brands such as Gillette
razors, Duracell, Braun, and Oral-B to their stable.
 The acquisition was approved by the European Union 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.

11.  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.

12.  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 initially
incorporated into a P&G unit known internally as
"Global 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.

13.  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 to
negotiate 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.

14.  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.

15. Year EBIT(1-t) Reinvestment FCFF TV PV factor
@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/
(0.0703-0.0425)
1,07,413
= 1,50,864
Value of P & G 1,28,972

16. Year EBIT(1-t) Reinvestment FCFF TV PV factor
@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/
(0.0739-0.0425)
25085
= 35,828
Value of 29,470
Gillette

17. 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 million
Value of Gillette = $ 29,470 million
Value of combined firm = $ 158,442 million
This would be the value of the combined firm in the
absence of synergy.

18. Year EBIT(1-t) Reinvestment FCFF TV PV factor
@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/
(0.0710-0.0425)
1,37,202
= 1,93,333
Value of P & G 1,63,912
(with synergy)

19. Value of combined firm (WITH synergy) = $ 1,63,912 million
Value of combined firm (with NO synergy) = $1,58,442 million
Value of Synergy = $ 5,490 million

20.  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)

21.  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.
 2031

22.  Biased Evaluation Process
 Managerial Hubris
 Failure to plan for synergy

23.  http://money.cnn.com/2005/01/28/news/fortune500/pg_gillette/
 people.stern.nyu.edu/adamodar/pdfiles/papers/synergy.pdf
 http://knowledge.wharton.upenn.edu/article.cfm?articleid=1135
 nb.vse.cz/~pichanic/cesp363/synergy