The Procter & Gamble (P&G)-Gillette Merger


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Case Details:

Case Code : BSTR159
Case Length : 19 Pages
Period : 2005
Organization : Gillette, Procter and Gamble
Pub Date : 2005
Teaching Note : Available
Countries : USA
Industry : FMCG

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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Excerpts

Background Note

P&G

P&G was established in 1837 when candle maker William Procter and his brother-in-law, soap maker James Gamble merged their small businesses. They set up a shop in Cincinnati and nicknamed it "Porkopolis"because of its dependence on swine slaughterhouses. The shop made candles and soaps from leftover fats. By 1859, P&G had become one of the largest companies in Cincinnati, with sales of $1 million. The company introduced Ivory, a floating soap, in 1879 and Crisco, the first all-vegetable shortening, in 1911.

In the 1940s and 1950s, P&G embarked on a series of acquisitions. It acquired Spic and Span (1945), Duncan Hines (1956), Chairman Paper Mills (1957), Clorox (1957; sold in 1968) and Folgers Coffee (1963)...

The Consumer Goods Industry in the Early 2000s

The consumer goods industry grew rapidly from the 1950s through the 1990s, thanks to the launch of new products from frozen foods to disposable diapers. It was a period of growing population and increasing disposable incomes. Products were marketed based on the concept of mass marketing. However, in the early 2000s, slow sales growth, increasing costs of inputs, emergence of private labels, lower margins, difficult price negotiations, and increasing diversity of channels, choices, and consumer types posed new challenges for this $ 2 trillion plus industry...

The Acquisition

As per the P&G and Gillette merger deal, P&G would exchange 0.975 shares of P&G common stock for each share of Gillette. It represented an 18% premium to Gillette shareholders based on the closing share prices on January 27, 2005. However, the merger was subject to approval by the shareholders of both Gillette and P&G. The merger was expected to get regulatory clearance by 2005. P&G planned to buy back $18-22 billion of its common stock immediately after the merger. The buy back process could take around 18 months to complete. This would make the deal structure a 60% stock and 40% cash deal, although on paper it was a pure stock-swap.

According to marketing guru, Al Ries, "The extra 18% premium paid by P&G for Gillette's stock is going to make it 18% more difficult for the deal to pay dividends to stock holders."P&G would have to borrow funds to finance the planned repurchase of its stock. In light of this move, credit rating agencies put both companies under a review for a possible downgrade. S&P placed all ratings for P&G on Credit Watch with negative implications based on the likelihood that P&G's leverage would increase significantly due to the merger. As of September 30, 2004, P&G had debts of $21.4 billion and Gillette of $3.1 billion...

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