The P&G-Gillette Merger: A Dream Deal?
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Authors
Authors: Ruchi Chaturvedi N & Pradip Sinha,
Faculty Member, Associate Consultant
ICMR (IBS Center for Management Research).
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Why Gillette?
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The question that comes to mind is, why did P&G have to acquire Gillette? Moreover, why did Gillette have to sell off its business, notwithstanding its power-packed performance in the global marketplace? Acquisitions are not new for P&G. The company bought the hair care firm Clairol from Bristol Myers Squibb in 2001 for $4.9 bn, and the German hair care firm Wella AG in 2003 for $7 bn. The companies acquired by P&G in the past were producing product(s) that matched P&G's product line. However, this deal is different. While P&G's strength lies in women's personal care products with brands such as Olay®, Always®, Tampax®, Cover Girl® and Max Factor®, Gillette's strength is in the men's grooming category with an entire range of Gillette and Braun products. According to Lafley, "This combination of two best-in-class consumer products companies, at a time when they are both operating from a position of strength, is a unique opportunity". Added James M Kilts, CEO, Gillette, "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." Refer to Table 1 for a comparison of both the companies. |
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According to reports, Gillette's stocks has climbed 50% since the beginning of 2003 and profits too jumped after the firm
focused on premium products, like its Mach3 razors, and employed long-term contracts with retailers. Generally, a stronger company acquires a weaker company, but this is not the case here. Both the firms are strong and competitive in their own segments, and are coming to combine their forces a unique and unusual combination.
The acquisition would add about 20% to P&G's sales. This is significant in an industry where sales growth is difficult to achieve. According to an interesting comparison, P&G's acquisition of Gillette would be similar to adding Colgate's sales to P&G's. Gillette had a net income of $1.39 bn in 2003, while P&G had $6.48 bn. The combined company forecasted operating margins of around 25% by the end of 2015, in comparison to margins of 19.1% in 2003.
Taking Gillette's growth potential into account, P&G had increased its long-term sales-growth estimates to 5-7% a year, that is, approximately $500 mn each year. According to a research report from Citigroup analyst Wendy Nicholson, the razors-and-blades business would account for 7% of sales and 12% of operating profits of the merged entity. Sales of men's grooming products in the US totaled $3.5 bn in 2004, and were expected to touch $8 bn by 2007. After the deal, health and beauty products would account for half of P&G's portfolio of products. Major gains could also come from bargaining with retailers on prices that would boost margins.
The companies expected cost savings of $14-16 bn from combining back-room operations and new growth opportunities. This would make the merger profitable in the third year. One of the areas of cost savings would be eliminating jobs. Both companies would also benefit from adapting each other's technologies and joint research and development. For example, in the area of RFID adoption, P&G and Gillette were early participants and much of their initial investment was likely to have been completed