The P&G-Gillette Merger: A Dream Deal?



Authors: Ruchi Chaturvedi N & Pradip Sinha,
Faculty Member, Associate Consultant
ICMR (IBS Center for Management Research).

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 marriage".

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.

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