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25575 Investment Banking Autumn 2015

Assignment (Group)
Due date of this assignment is Friday 15 May. Assignments (printed, not an electronic
file) may be submitted in the tutorial or lecture in Week 10.
The total mark is 30. Assignments submitted 24 hours late will attract a penalty of
50% of the marks earned. A 100% mark deduction will apply after 48 hours.
The cover sheet of the assignment must include the names and student numbers of all
members in your group.
Number of pages in the assignment is limited to a maximum of 15 (A4) pages.

The questions relate to Case Study 4:

The best deal Gillette could get? - Proctor & Gambles acquisition of Gillette

Question 1

[5 marks]

When the proposed acquisition of Gillette by Proctor & Gamble (P&G) was announced in late
2004, Warren Buffett called the transaction a dream deal that would create the greatest
consumer product company in the world.

Prior to Proctor & Gambles proposal in 2004, Gillette had fended off several
hostile attempts at take-over in the late 1980. What were these unsuccessful
attempts and how were they different from the proposal made by Proctor &
Gamble?** (1 mark)

What were the possible synergies and other driving forces propelling the
merger between P&G and Gillette? (4 marks)

** You are not required to give details (financial or otherwise) about these unsuccessful attempts.
You only need to identify who made these attempts and indicate in what way(s) they might be
considered different to P&Gs.

Question 2

[5 marks]

James Kilts was appointed Gillettes CEO in January 2001. During his tenure, the shareholder
value of Gillette increased by about $20 billion. After announcement of the merger, Kilts received
a pay package of more than $164 million in severance and other compensation from Gillette.
In your view:

Was the compensation paid to Kilts reasonable (or justifiable)? (Please offer
reasons to support your view/conclusion). (2 marks)

Was his pay package in the best interest of the shareholders? (1 mark).

Why P&G did not use a collar in the merger proposal? (2 marks)

Question 3

[6 marks]
Evaluate the Proctor & Gamble offer. Identify and explain the positive and
negative aspects of using (receiving) shares or cash for the acquisition from
both the perspective of P&G and Gillette shareholders. (6 marks)

Question 4

[6 marks]

Figure C4.4 (Stowell, page 502) shows the valuation of the deal calculated using various methods.
For example, the sum of the parts valuation (in the middle of the diagram), assuming one billion
Gillette shares, generates a value of $47 to $58 per share after subtracting $2.25 of net debt per
share. Figure C4.5 (Stowell, page 503) dissects this sum of the parts valuation by product
division (for example, B&R = blades and razors) using multiples analysis.

Give a brief description of the discounted cash flow (DCF) analysis and draw
out the differences in the three variations as shown in Figure C4.4. (2 marks)

In Figures C4.5, how were the maximum and minimum $ per share values
calculated for the product divisions? Demonstrate this for two of the product
divisions (approximate figures will do!) (2 marks)

When cost savings and total synergies are taken into account, the DCF analysis suggests that
Gillette shares should be valued at $61.90 per share. The offer accepted by Gillette implied a
value of $54.05

Question 5

Question 6

Was Gillette wrong in accepting this lower valuation? Give some reasons to
support your answer. (2 marks)

[4 marks]
Discuss the conflicts of interest for the investment bank in a mergers and
acquisitions transaction where the same firm (investment bank) that writes
the fairness opinion in support of the deal stands to receive a large fee if the
transaction is completed. (4 marks)

[4 marks]

Warren Buffett felt so strongly about the P&G-Gillette mergers benefits that he purchased
additional P&G and Gillette shares; he would own 3.9% of the combined company upon the
completion of the merger.

Discuss the role played by Warren Buffett in the P&G-Gillette merger. Should
the support of one investor be a deciding factor in the completion of an M&A
transaction? (2 marks)

Companies intending to merge may face scrutiny from regulators and/or politicians.

Outline some concerns that regulators or politicians could raise in regard to

any proposed merger. Were there other issue(s) that attracted attention by
politicians in the case of P&Gs proposal to acquire Gillette? (2 marks)