Monday, November 11, 2019
P&G Gillette Merger
P&G-Gillette Introduction On January 28th 2005 P&G agreed to buy Gillette for $57bn (? 30). Gillette was the number 1 in razor accessories and proctor gamble was number 1 in consumer products, a marriage of the best in their respective industries. The merger of the two companies created â€Å"the world’s largest consumer products conglomerate. †Gillette was a leader in its category of razors and batteries, merging with P&G provided it access to P&G’s technology and marketing skills. P&G added Gillette razors , Right Guard deodorant and Duracell batteries to its more than 300 consumer brands, including Ivory Soap, Head and Shoulders shampoo, Pringles, Crest toothpaste and Bounty paper towels. Company Background P&G P&G a fortune 500 company headquartered at down Cincinnati, Ohio. P&G is manufacturer of wide range of consumer products ranging from Ivory Soap, Head and Shoulders shampoo, Pringles, Crest toothpaste and Bounty paper towels. P&G reported revenue of $82. 6 billion in 201. P&G was started in 1837 when William Proctor, a candlemaker, and James Gamble, a soapmaker, met in Cincinnati to become business partners and Proctor and Gamble was born. In 1858–1859, sales reached $1 million. By this point, approximately 80 employees worked for Procter & Gamble. In 1880, P&G discovered and marketed an inexpensive soap that floats on water called Ivory soap. William Arnett Procter, William Procter's grandson, started a profit sharing program with the company’s workforce in 1887. This program eliminated the chances of workers going to strike. Company opened many facilities to cover up the exponentially increasing demand. In 1920’s and 1930’s when radio because popular, P;G sponsored a number of shows and soon the radio shows were known as ‘soap operas’. P;G expanded into new countries in both areas: manufacturing and product sales and with the acquisition of Thomas Hedley co. in 1930, P;G became an international corporation. Large number of products and brand names were introduced over time, and P;G branched out into new areas. â€Å"Tide†, laundry detergent, and â€Å"Prell†shampoo was introduced by the company in 1946 and 1947 respectively. First toothpaste â€Å"Crest†containing fluoride was sold by P;G in 1955. In 1957 company branched out again with the purchase of Charmin Paper Mills and began manufacturing toilet paper and other paper products. Once again focusing on laundry, Procter ; Gamble began making â€Å"Downy†fabric softener in 1960 and â€Å"Bounce†fabric softener sheets in 1972. Prior to 1960 Johnson and Johnson were manufacturing disposable diaper called â€Å"Chrux†but P;G came out with one of the most revolutionary products on the market called â€Å"Pampers†, first test-marketed in 1961. Babies always wore cloth diapers, which were leaky and labour intensive to wash. Pampers provided a convenient alternative, albeit at the environmental cost of more waste requiring landfilling. To diversify its product line and to increase profits P;G acquired a number of companies. Some of the acquisitions included Folgers Coffee, Norwich Eaton Pharmaceuticals (the makers of Pepto-Bismol), Richardson-Vicks, Noxell (Noxzema), Shulton's Old Spice, Max Factor, and the Iams Company. In 1994, P&G was in top headlines, the management was placed in an unusual position of testifying in front of court in engaging with interest rate derivatives which they were not much capable to understand and incurred huge losses from that leveraged position and later on they sued the Bankers trust for the fraud. In 1996, P&G was again in headlines as Food and Drug Administration approved a new Product developed by company called Olestra. As the brand was called Olean, it was a lower-calorie substitute for fat used in cooking potato chips and other snacks but during its development stage it was associated with anal leakage and gastrointestinal difficulties in humans. On 28th January 2005 Gillette was acquired by P&G, forming the largest consumer goods company and placing Unilever into second place. This acquisition helped P&G to add new products into its product line that included brands such as Gillette razors, Duracell, Braun, and Oral-B. The European Union and the Federal Trade Commission approved the acquisition, with conditions to a spinoff of certain overlapping brands. P&G agreed to sell its Spin Brush battery-operated electric toothbrush business to Church & Dwight. P&G also divested Rembrandt a Gillette's oral-care toothpaste line. Official merger took place on October 1, 2005. The deodorant brands Right Guard, Soft ; Dri, and Dry Idea and Liquid Paper, and Gillette's stationery division, Paper Mate was sold to Dial Corporation and Newell Rubbermaid respectively. In 2008, P&G branched into the record business with its sponsorship of Tag Records, as an endorsement for TAG Body Spray. Gillette Gillette, originally founded as American Safety Razor Company, is a world leader in men grooming products as well as of women. It was founded by King Gillette who in 1895 came up with the idea of disposable razor after being frustrated by dulled old razors that required professional honing. He envisioned an inexpensive razor blade combination where blade can be clamped on the razor and once getting dulled can be replaced. After six years of innovation and engineering finally in 1901 after joining hands with a MIT machinist, William Nickerson, American Safety Razor Corp was born. In 1903 company was renamed as Gillette. Company paid the first cash dividend in 1906. Before First World War Gillette expanded abroad opening in London, first sales office was opened, manufacturing plants in Paris, Montreal, Berlin, and Leicester, England, and offices in France and Hamburg, Germany. By 1923, Income from foreign operation accounted for 30% of the total income. In 1910, Owner and President King Gillette decide to sell a major portion of his stake to investor John Joyce. Joyce was made the vice-president of the company. After his death in 1916 his friend, Edward Aldred, bought out the shares left to Joyce and took charge of the company. Gillett’s patent on safety razor expired in 1921 and company was ready for new change. Gillette introduced the â€Å"new improved†razor at the old price, and used the old style razor, renamed the Silver Brownie razor at $1, to enter the low-priced end of the market. Gillette transformed into the razor blade model by giving away razor handles as premiums with other products, developing customers for the more profitable blades. Abroad expansion also continued. In 1922 Gillette became royal purveyor to the prince of Wales and in 1924 to King Gustav V of Sweden. Gillette came into top headlines when its Paris office gave Charles Lindbergh a Gillette Gold Traveler after he completed the first transatlantic flight. Company named Auto Strop Safety Razor, owned by Henry J. Gaisman, filed suit against Gillette for patent infringement after Gillette produced a new blade using a continuous-strip process similar to one originally demonstrated to Gillette by Gaisman. Merging with Auto Strop solved the problem for Gillette but it gave birth to another problem. Gaisman checked the company's financial records and found out that Gillette had over-reported its earnings by $3 million for the past five. Stock price of Gillette fell from a high of $125 early in 1929 to $18 by end of decade. This led to the reorganization of Gillette. King Gillette resigned as nominal president and Gaisman became the new chairman of Gillette and Gerard B. Lambert, son of the founder of the Lambert Pharmacal Company and a former manager there, came out of retirement to become president of Gillette. Gillette blatantly went to market and admitted the poor quality of its old blade and came up with a blade called blue blade made by continuous-strip process. Gillette entered into sports advertising and this lead to sharp increase in the sales. In 1942 sports events held by Gillette were called ‘Gillette Cavalcade of Sports’. In 1962 Gillette faced tuff competition from the English Wilkinson Sword Company as it started exporting the stainless steel blades to United States. Gillette also faced challenges from local player in stainless steel category and was left behind in the race. Gillette was left behind and latter it jumped into and developed a new blade but at that time it had lost its market share by 10%. By 1971 Gillette had four domestic divisions: the Safety Razor Division; the Toiletries Division, which featured Right Guard deodorant and antiperspirant; the Personal Care Division; and the Paper Mate division. In mid 1970’s Gillette divested its business by selling off unprofitable business such as Buxton in 1977, Welcome Wagon in 1978, and Hyponex and the Autopoint mechanical pencil business in 1979 and pumping money into the core business. In 1986, Gillette was being pursued by Ronald Perelman, who had previously taken over Revlon. He was about to make a tender offer for Gillette, Gillette responded by paying Revlon $558million in return for Revlon not making a tender offer. This exposed the Gillette vulnerability and it resulted in Gillette going with standstill agreement with 10 different companies. Gillette had responded to various takeover threats by cutting cost and thinning the workforce. Gillette also divested its weak operations and because of it stock showed a jump by 24%. By 2004 Gillette had annual sales of $10. 5 billion and net income of $1. 7 billion. The Acquisition On January 28th 2005 P;G announced the acquisition of Gillette. As per the deal, 0. 975 shares of P;G common stock were exchanged for each share of Gillette. It accounted for 18% premium to Gillette shareholders based on the closing share prices on January 27, 2005. However, the approval by the shareholders of both Gillette and P;G was required. The merger was expected to get regulatory clearance by 2005. P;G planned to buy back $18-22 billion of its common stock in around 18 months immediately after the merger. The structure of deal came out to be 60% stock and 40% cash, although on paper it was a pure stock-swap. | The extra 18% premium paid by P;G for Gillette's stock looked like that it made 18% more difficult for the deal to pay dividends to stock holders. The problem was in buying back shares as P&G would have to borrow funds to finance this transaction. In light of this move, both the companies came under the scanner of credit agency for a possible downgrade. S&P considered all the rating for P&G under negative umbrella watch based on the likelihood that the deal would cause P&G to increase its leverage. As of September 30, 2004, P&G had debts of $21. 4 billion and Gillette of $3. 1 billion. Synergies Gillette maintains 64 manufacturing facilities in 27 countries, and its products are sold in more than 200 countries and territories, with more than 60 percent of sales occurring outside the United States. For P&G the acquisition of Gillette was an opportunity for P&G to add a masculine dimension to overwhelmingly female-biased portfolio. This seems to be a merger of exactly strategically fit companies who complement each other. It was combination of two best-in-class companies creating a stronger brand portfolio, opportunities for even more innovation, faster sales growth, and cost savings. The importance of economies of scale and focus as described by analyst, P&G had attempted to gain both with this acquisition. There was change in marketing sense as Gillette market was mostly towards men so P&G women dominated product category have showed steep learning curve in understanding the men marketing. It was boost to its product category and therefore enhancing the top line. Both the companies have presence in different part of globe made the deal a geographical fit. Gillette has strong presence in countries such as Brazil and in India, where P&G has been lagging behind Unilever. P&G has excellent penetration and distribution in China, the Philippines and fast-growing Eastern European markets such as Russia and Poland. Diversification of Product Portfolio As there was little overlapping in Gillette and P&G business this helped P&G to broaden its product base and offer more products to men in its women dominated product category. Story Now After five years of the deal, things haven’t gone the way as expected. The boost to the top line that was expected by P&G with acquisition of Gillette has been in doldrums. P&G has lost the Gillette top management talent as most of senior managers (with the notable exception of current P&G Vice Chairman Ed Shirley) have left. P&G's stock has lagged behind key competitors', including Colgate-Palmolive Co. and Unilever, beaten P&G 4 to 1 and 3 to 1, respectively, in the stock market. The recession has played against P&G decline in sales in Gillette products have become a reason of worry for P&G. P&G executives and Gillette officials show an optimistic view on the deal they feel still a lot more is still to come. Gillette has helped P&G to transform in different ways that aren't always obvious. P;G has made aggressive moves in key markets such as Brazil and India; a much stronger operation throughout Europe and an even stronger showing on U. S. retail shelves; a ever growing investment which will increase the companies efficiency and help it to deliver the best with innovated products. The deal has indeed given both the companies significant advantages. Economies of scale have been brought in along with some cost cutting giving P;G increase in revenue and income. But only time will tell if this union of seemingly very compatible partners is truly a match made in heaven. Exhibits P;G balance sheet Balance Sheet| | | 29-Jun-11| 29-Jun-10| 29-Jun-09| 29-Jun-06| Assets| | Current Assets| | | Cash And Cash Equivalents| 2,768,000  | 2,879,000  | 4,781,000  | 6,693,000| | Short Term Investments| –  | –  | –  | | | Net Receivables| 7,415,000  | 6,325,000  | 7,045,000  | | | Inventory| 7,379,000  | 6,384,000  | 6,880,000  | | | Other Current Assets| 4,408,000  | 3,194,000  | 3,199,000  | | Total Current Assets | 21,970,000  | 18,782,000  | 21,905,000  | | Long Term Investments| –  | –  | –  | | Property Plant and Equipment| 21,293,000  | 19,244,000  | 19,462,000  | | Goodwill| | 57,562,000  | 54,012,000  | 56,512,000  | | Intangible Assets| | 32,620,000  | 31,636,000  | 32,606,000  | | Accumulated Amortization| –  | –  | –  | | Other Assets| | 4,909,000  | 4,498,000  | 4,348,000  | | Deferred Long Term Asset Charges| –  | –  | –  | | Total Assets | | 138,354,000  | 128,172,000  | 134,833,000  | | Liabilities| | | | | | Current Liabilities| | | | | Accounts Payable| 17,312,000  | 15,810,000  | 14,581,000  | | | Short/Current Long Term Debt| 9,981,000  | 8,472,000  | 16,320,000  | | | Other Current Liabilities| –  | –  | 7,768,000  | | Total Current Liabilities | 27,293,000  | 24,282,000  | 30,901,000  | | Long Term Debt| | 22,033,000  | 21,360,000  | 20,652,000  | | Other Liabilities| | 9,957,000  | 10,189,000  | 9,146,000  | | Deferred Long Term Liability Charges| 11,070,000  | 10,902,000  | 10,752,000  | | Minority Interest| | 361,000  | 324,000  | 283,000  | | Negative Goodwill| –  | –  | –  | | Total Liabilities | | 70,714,000  | 67,057,000  | 71,734,000  | | Stockholders' Equity| | | | | Misc Stocks Options Warrants| –  | –  | –  | | Redeemable Preferred Stock| –  | –  | –  | | Preferred Stock| | 1,234,000  | 1,277,000  | 1,324,000  | | Common Stock| | 4,008,000  | 4,008,000  | 4,007,000  | | Retained Earnings| 70,682,000  | 64,614,000  | 57,309,000  | | Treasury Stock| | -6. E+07| -6. 1E+07| -5. 6E+07| | Capital Surplus| | 62,405,000  | 61,697,000  | 61,118,000  | | Other Stockholder Equity| -3411000| -9172000| -4698000| | Total Stockholder Equity | 68,001,000  | 61,439,000  | 63,382,000  | | Net Tangible Assets | -2. 2E+07| -2. 4E+07| -2. 6E+07| | P&G Income statement FINANCIAL SUMMARY (UNAUDITED) Amounts| 2006| 2005| 2004| 2003| 2002| Net Sales| $68,222| $56,741| $51,407| $43,377| $40,238| Operating Income| 13,249| 10,469| 9,382| 7,312| 6,073| Net Earnings| 8,684| 6,923| 6,156| 4,788| 3,910| Net Earnings Margin| 12. 70%| 12. 20%| 12. 00%| 11. 00%| 9. 70%| Basic Net Earnings Per Share Common Share $| 2. 79| 2. 7| 2. 34| 1. 8| 1. 46| Diluted Net Earnings Per Common Share| 2. 64| 2. 53| 2. 2| 1. 7| 1. 39| Dividends Per Common Share| 1. 15| 1. 03| 0. 93| 0. 82| 0. 76|
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