CONTENTS

1. INTRODUCTION .......................................................................................................................... 2
2. RATIONALES FOR THE PROCTER & GAMBLE – GILLETTE MERGER ............................. 2
2.1. Challenges in consumer goods industry.................................................................................. 2
2.2. Synergies ................................................................................................................................. 3
3. WAYS OF EXECUTION ............................................................................................................... 4
Table 1: Merger Terms ....................................................................................................................... 4
Table 2: Ownership Ratios.................................................................................................................. 5
4. REACTION FROM THE SECURITIES MARKET ...................................................................... 6
5. BUSINESS OUTCOMES RELATED TO THE MERGER ........................................................... 6
Table 3: Financial Summary 2006 – 2010 (Unaudited) ...................................................................... 7
Table 4: Financial Summary 2001 – 2005 (Unaudited) ...................................................................... 7
6. CONCLUSION: .............................................................................................................................. 7
7. BIBLIOGRAPHY ........................................................................................................................... 9

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1. INTRODUCTION
Nowadays, Mergers and Acquisitions (M&A) has become a major topic of modern corporate
finance. It has a long history and developed together with the development of modern
practice of corporate finance management. According to Brigham and Ehrhardt (2005:845)
there are five “merger waves” that respectively occurred in the US in the late 1980s, 1920s,
1960s, 1980s and recently the fifth wave “which involves strategic alliances designed to
enable firms to compete better in the global economy, is in progress today”. Discussing the
following merger case of the two companies Procter & Gamble (P&G) and Gillette is going
to support to answer questions what are the rationales behind any M&A decisions, in what
ways a M&A case is regularly executed by the involved companies, why M&A information
is much important to investors, how could/couldn’t this combined company success after the
merger.

2. RATIONALES FOR THE PROCTER & GAMBLE – GILLETTE MERGER

2.1. Challenges in consumer goods industry

Considering business environment of the consumer goods industry during the early 2000s,
there were many reasons that contributed directly to this merging decision of both P&G and
Gillette.

As stated by Ruchi Chaturvedi N & Pradip Sinha, Associate Consultant ICMR (IBS Center
for Management Research) this industry started to face with many issues by the end of 1980s.
(Cited http://www.icmrindia.org/free%20resources/articles/Gillette%20merger7.htm, [5
Nov.2010]):

- Slow sales growth after the golden period 1950-1980 with high and continuous
growth.
- The stiff competition from the key rivals also led to the low profit margin for the
whole industry.
- Competition also comes from the emergence and development of private- label brands
which definitely possesses low price advantage. According to the recent research,
customers have become more price-conscious and less brand-conscious during this
decade.

According to Andrew Ross Sorkin and Steve Lohr, two economic analysts of the New York
Times, both Procter & Gamble and Gillette were pressured by giant retailers, especially on
the bargain position. (Cited http://www.nytimes.com/2005/01/28/business/28cnd-procter.html
[10 Nov. 2010])
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Analysts believed that the above situations led to the merging decision of the two companies
as a force rather than the choice.

2.2. Synergies
Both these two companies emphasized enormous synergies that the combined firm would
definitely possess as following statements:

“This combination of two best-in-class companies creates a stronger brand portfolio,

opportunities for even more innovation, faster sales growth, and cost savings.”

- AG Lafley, Chief Executive Officer, P&G

(Cited http://www.icmrindia.org/casestudies/catalogue/business%20strategy/BSTR159.htm
[5 Nov 2010])

Detailing for the above statement, AG Lafley added: “We believe we can bring these
companies together and create a juggernaut”. “The more scale a company can create, the
more opportunities there are to grow margins and invest in brand innovation.” (Cited
http://www.msnbc.msn.com/id/6878219/ns/business-us_business [5 Nov.2010])

In other words, James M. Kilts, Chief Executive Officer, Gillette Co said: “I’m a great
believer in scale,” “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.” (Cited
http://www.nytimes.com/2005/01/28/business/28cnd-procter.html [10 Nov. 2010])

These two companies’ leaders emphasized the value of scale, cost saving, margins and
sustainable growth in relation to this merger. Establishing a “juggernaut” could support them
to increase sales, enhance bargain power, be more effective in terms of distribution,
marketing and R&D budgeting. The combined company also would create a high margin due
to a higher profit products portfolio as well as cost saving from jobs cutting and the
combination of the two companies’ business support functions.

According to Advertising Age Magazine, in 2004 Gillette spent about $600 million on
marketing and P&G had paid $5.5 billion on advertising that was more than any companies.
According to P&G, the budget used for R&D for Procter & Gamble and Gillette was
respectively $1.8 billion (2004) and $0.2 billion (2003) and the total value of these kinds of

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cost would be deducted after the merger. In addition, the two companies forecasted that
operating margins would reach 25% by 2015, compared to P&G’s figure of 19.1% in 2003.

Moreover, the executives of the two firms expected to gain from $14 to $16 billion in annual
benefit that would be contributed by the gains from the higher bargain position with giant
retailers, media companies, sales growth opportunities with higher margin portfolios, savings
from R&D and cost savings from eliminating 6,000 jobs (about 4% the workforce of 140,000
worldwide P&G’s employees and 29,600 Gillette’s employees). (Cited
http://www.icmrindia.org/free%20resources/articles/Gillette%20merger7.htm, [5 Nov.2010])

3. WAYS OF EXECUTION
$57 billion for the value of the deal has been the biggest deal in the history of fast moving
consumer good (FMCG) industry. According to the deal, the two firms had signed the
“Agreement and Plan of Merger” on Thursday 27th Jan 2005. Just one day later, Friday 28th
Jan 2005 the leaders of both companies announced the deal to public. Following that, P&G
accepted to exchange with the rate 0.975 common stock of P&G (or about $54.05) for each
share of Gillette. It meant P&G paid 20% premium to shareholders of Gillette basing on the
closing price of Procter & Gamble, $55.44 per share on Wednesday 26th Jan 2005 (one day
before the two companies signed the “Agreement and Plan of Merger”).

Table 1: Merger Terms

Merger Terms Shares P&G Stock Value per Total Value
Price share (billions)

P&G Shares 965.25 $55.44 $54.05 $53.513

Gillette stock value (end of $45.00

Wednesday 26th Jan 2005)

Premium 20%

(Sources: http://www.anderson.ucla.edu/faculty/john.weston/papers/PG-Gillette.doc.)

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 Table 2: Ownership Ratios
Pre-Merger

Dollar Amounts Percentage

P&G Gillette Total P&G Gillette

Share Price1 $55.44 $45.00

Shares Outstanding 2515 990

(million)2

Total Market Value $139.432 $44.550 $183.982 0.758 0.242

(billion)

Exchange Terms 0.975 for 1

Post-Merger

No. of Shares (million) 2515 965.25 3480.25 0.723 0.277

1
On Wednesday 26th January, 2005 (one day before the “Agreement and Plan of Merger”
was signed.)
2
Source: Value Line
(Sources: http://www.anderson.ucla.edu/faculty/john.weston/papers/PG-Gillette.doc. Wall
Street Journal, New York Times and Businessweek)
The shareholders certainly had reasons to be apprehensive about the effects of the deal that
could dilute their share price when P&G issued more stocks for this acquisition. To reduce
shareholders’ concerns, P&G promised to buy back its outstanding shares with the amount of
$18-$22 billion in next 12 – 18 months to offset a part of common stocks which would be
issued to close the deal. This commitment means P&G planned to pay for the deal with the
ratio: 40% by cash, 60% by stocks. In fact, by middle of May 2005 P&G already bought 54
million shares.

The chief executive of Berkshire Hathaway Inc., the billionaire Warren E. Buffett was also
the Gillette’s largest shareholder who was really excited about the deal. He called this
transaction as “a dream deal”. He added: "This merger is going to create the greatest
consumer products company in the world," At that time he owned 33% of Berkshire
Hathaway which was holding 96 million shares of Gillette, which were equivalent to 9.67 %
of the company. After the merger, Berkshire Hathaway would receive 93 million share of the

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combined company. Warren E. Buffett also stated that he intended to increase his holding to
100 million shares in the new firm.

4. REACTION FROM THE SECURITIES MARKET

The movement of securities market immediately reflected all news of the merger as well as
the statement of the American billionaire Warren E. Buffett. End of Friday 28th Jan 2005,
price of Gillette’s shares jumped 12.3% (+ $5.61) to $51.30 on New York Stock Exchange.
On the other hand, Procter and Gamble’s shares fell 2.5% (-$1.40) to $53.92 due to the
worries of P&G’s shareholders/investors about the diluted share price probabilities as
discussed above.

In 12nd Jul 2005, shareholders of both firms approved for the merger that allowed
transferring $460 million for Gillette’s top executives, $164.5 million for Jim Kilts – the CEO
of Gillette. Gillette was advised by UBS and Goldman Sachs and Merrill Lynch advised for
P&G. Therefore, these financial institutions each would get $30 million - plus expenses.

October 2005, Procter and Gamble informed that the merger was completed.

5. BUSINESS OUTCOMES RELATED TO THE MERGER

In 2010 Procter & Gamble is the only company presented in the Top 5 for six consecutive
years on the Dow Jones Sustainability Index 2000 – 2010. It also has been ranked 13th of the
Global 100 Most Sustainable Corporation in the World.

Despite a lower increase in the latest period, the company also had a significant growth
46.7% in the value of net earnings from $8.684 billion (2006) to $12.736 billion (2010). It
was worth for investors/shareholders to note that the combined firm has been delivering very
good results after the merger when dividends per common share increased sharply during last
5 consecutive years with an annual rise at 11.3% which was much higher than the average
results of the period 2001-2005 with 9.43%.

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 Table 3: Financial Summary 2006 – 2010 (Unaudited)

(The fiscal year ending at 30th June, amounts in millions, except per share amounts)

Indicators/year 2010 2009 2008 2007 2006

Net Sales $78,938 $76,694 $79,257 $72,441 $64,416

Operating Income 16,021 15,374 15,979 14,485 12,551

Net Earnings 12,736 13,436 12,075 10,340 8,684

Net Earnings Margin from Continuing

13.9% 13.9% 14.2% 13.3% 12.7%
Operations

Dividends Per Common Share 1.80 1.64 1.45 1.28 1.15

Source: Procter & Gamble Co.,

Table 4: Financial Summary 2001 – 2005 (Unaudited)

(The fiscal year ending at 30th June, amounts in millions, except per share amounts)

Indicators/year 2005 2004 2003 2002 2001

Net Sales $55,292 $50,128 $42,133 $38,965 $37,855

Operating Income 10,026 9,019 6,931 5,672 3,976

Net Earnings 6,923 6,156 4,788 3,910 2,612

Net Earnings Margin from Continuing 12.0% 11.8% 10.8% 9.4% 6.4%
Operations

Dividends Per Common Share 1.03 0.93 0.82 0.76 0.70

Source: Procter & Gamble Co.,

6. CONCLUSION:
$57 billion for the deal of acquisition between Procter & Gamble and Gillette has been the
biggest deal in history of fast moving consumer goods industry. It boosted the merger’s
annual sales $61 billion that supported P&G to be the biggest FMCG Company in the world,
which possesses 21 million-dollar brands portfolio with the capitalization about $200 billion.
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As a result, the combined company has been more influential for the consumer products
industry and changed the forces in the market. Therefore, it has had a better bargain position
in the deals to gain higher margins. The advantages of scale and the combination of these two
companies’ business support functions directly contributed to reduce input costs, to form a
higher margin products portfolio and finally to maximize profit, the value of the new
company as well as the value of its shares. Analysts also believed that this successful
transaction can lead to the new wave of mergers and acquisitions in this industry in the near
future.

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7. BIBLIOGRAPHY
Barker, R. 2005, P&G: Razing Rivals with Gillette?, Businessweek,
http://www.businessweek.com/bwdaily/dnflash/jan2005/nf20050128_4746.htm [10 Nov.
2010]

Brigham and Ehrhardt (2005): Financial Management: Theory and Practice, 11th edition,
Ohio: South-Western

IBS Center for Management Research (2010): The Procter & Gamble (P&G)-Gillette
Merger, http://www.icmrindia.org/casestudies/catalogue/business%20strategy/BSTR159.htm
[5 Nov 2010]

Isidore, C. 2005, P&G to buy Gillette for $57B, CNN,

http://money.cnn.com/2005/01/28/news/fortune500/pg_gillette/ [5 Nov.2010]

McClure, B. 2010, Mergers and Acquisitions, Investopedia,

http://www.investopedia.com/university/mergers/ [10 Nov.2010]

Pitman, S. 2006, Gillette merger spells boost for P&G,

http://www.cosmeticsdesign.com/Financial/Gillette-merger-spells-boost-for-P-G. [10 Nov.
2010]

Procter & Gamble Co (2010): 2010 Anual Report,

http://annualreport.pg.com/annualreport2010/?utm_source=pgcom&utm_medium=ir&utm_c
ampaign=ar2010 [5 Nov 2010]

Procter & Gamble Co (2010): Financial Highlights,

http://www.pg.com/en_US/investors/financial_reporting/financial_highlights.shtml [5 Nov
2010]

Procter & Gamble Co (2010): Information on Exchange of Gillette Shares,

http://www.pg.com/en_US/investors/investing_in_pg/gillette_shareholders.shtml [5 Nov
2010]

Ruchi Chaturvedi N & Pradip Sinha. 2005, The P&G-Gillette Merger: A Dream Deal?,
ICMR (IBS Center for Management Research),
http://www.icmrindia.org/free%20resources/articles/Gillette%20merger7.htm, [5 Nov.2010]

Sorkin, R. & Lohr, S. 2005, Procter Reaches $57 Billion Deal to Buy Gillette, New York
Times, http://www.nytimes.com/2005/01/28/business/28cnd-procter.html [10 Nov. 2010]

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The Associated Press.2005, Procter & Gamble to buy Gillette for $57 billion, The Associated
Press, http://www.msnbc.msn.com/id/6878219/ns/business-us_business [5 Nov.2010]

The Barker Portfolio. 2005, P&G's $57 Billion Bargain, Businessweek,

http://www.businessweek.com/magazine/content/05_30/b3944031_mz026.htm[5 Nov.2010]

Weston, J.2005, Procter & Gamble-Gillette Merger,

http://www.anderson.ucla.edu/faculty/john.weston/papers/PG-Gillette.doc. [5 Nov 2010]

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