Term Paper on "Mergers and Acquisitions the Case of Procter&gamble"

Term Paper 5 pages (1693 words) Sources: 6 Style: MLA

[EXCERPT] . . . .

Mergers and Acquisitions

The Case of Procter&Gamble buying Gillette

The actual meaning of the terms merger and acquisition have long been disputed and analyzed and generally all definitions are basically the same, but otherwise said. In this order of ideas, the definition given by Amos Web Dictionary is one that best captures the essence of most definitions. According to them, a merger represents the "consolidation of two separately-owned businesses under single ownership" and it can be done in three ways: horizontal, when the two companies have similar industrial positions (items produced, net revenues); vertical, when the companies produce the same products, but in different stages; and conglomerate, when the companies belong to different industrial sectors. The term acquisition refers to the act of actually buying another company in order to benefit of the advantages of the bought company and form a stronger firm.

Mergers and acquisitions are management tools used to increase profits and expand operations, considered beneficial for both parties in a process of due diligence. According to Wikipedia, the Free Online Encyclopedia, the process of due diligence refers to the buyer company evaluating the target company in order to merge with or acquire it.

In order for the transaction to be successful, both companies need to delegate specialized personnel to handle the M&a (the key players of the transaction); they must clearly analyze all possible outcomes (the rationale of the merger) and also analyze the investment market in case of insufficient funds to finalize the transaction.

2. The rationale of the merger

One of the most significant, if not the most important, business transaction of the year 2005 was the merging of Procter&Gamble with Gillette. Having to choose from Procter&Gamble buying Gillette, slow growth of the GDP, stocks decrease and the raise of budget deficits, users of the website CNN Money voted P&G buying Gillette the "top business news story" with a majority of 59 per cent.

Procter&Gamble is an American leading manufacturer of consumer goods from diapers to detergents, registering revenues of over 68.222 billion dollars. However occupying the first position in the industry of United States' consumer goods, P&G is only the second best word wide, being outrun by the Anglo-Dutch company Unilever.

The merger with Gillette from 2005 had its main objective gaining the leading position worldwide and it was based on the following rationale: both Procter&Gamble as well as Gillette were strong companies, internationally acknowledged. However, none of the two, taken separately, held the first position in the manufacturing and selling of consumers goods and they were constantly threatened by Unilever. In order to dethrone their common "enemy" and become the strongest competitors on the market, the companies needed to merge.

In this order of ideas, by acquiring Gillette, Procter&Gamble added the already renowned products such as Gillette razors, Duracell batteries, Braun products and Oral-B dental hygiene to their product line (Ariel, Lenor, Tide and so on) towards becoming "the largest consumer goods company, displacing the Anglo-Dutch Unilever into second place."

Moreover, a merger of the two seemed to alleviate the lacking elements in both companies' activity, by completing each other. For instance, P&G specialized in women care products, such as Always or Max Factor, whereas Gillette specialized in men's products, such as razors or aftershaves. Therefore, the fact that the two companies possessed "complementary expertise" was a clear pro-for the merger.

Aside from becoming the world's leader in selling consumer goods, the merger of P&G and Gillette was also supported by the companies' sharing a common view of technology. In other words, both Procter&Gamble and Gillette realized that information technology is becoming an increasing part of today's existence and desired to support it. Therefore, in using it to promote their merger, the two companies would "pay attention to how it can drive business innovation, boosting their firms' use of promising consumer and supply chain technologies."

3. The key players

However the suggestion of acquiring Gillette was unanimously approved by the board members of both companies, there were some people that played key roles in the merger.

One of these people was P&G chief executive a.G. Lafley. He was a forceful advocate of the merger from early 1999, when the idea of buying Gillette was only a vague future plan. Proof of his undoubted support for the merger stands his statement in an interview for CBS News. In the interview, Lafley stated: "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."

Another personality that played a key role in the merger was Gillette chairman and CEO James M. Kilts. Kilts was the main Gillette executive that negotiated the transaction terms with P&G representatives and has the merit of selling Gillette at the impressive sum of 57 billion dollars (the largest investment ever made by Procter&Gamble). Kilts' actions have long been subjected to criticism as it was said that the merger brought him not less than 165 million dollars. Shortly after the transaction was completed, Kilts became a member of the Board of Directors at New York Times Company. Nonetheless, regardless of his personal interests, Gillette CEO played an important role in the merger and aided to the foundation of the largest consumer products manufacturer in the world.

4. The role of investment bankers in the transaction

The investment bankers that took part in the Procter&Gamble - Gillette fusion were Best Investment Banks, Institutional Shareholder Services and UBS Investment Bank, all contracted to analyze P&G's offer and advice Gillette on a possible merger.

All three investment specialists agreed that the 57 billion dollars offer placed by Procter&Gamble was fair and advised Gillette to initiate the merger. "Overall we it see as a positive deal for shareholders, said Chris Young, co-head of mergers and acquisition research for ISS." Bank investors analyzed P&G's offer objectively and mentioned that the impressive commission received by Gillette CEO James Kilts, however slightly exaggerated, should "not constitute a reason for shareholders to oppose the deal."

Another investor that played a key role in the Procter&Gamble - Gillette fusion was Berkshire Hathaway, Gillette's main shareholder. According to Berkshire CEO and investor, billionaire Warren Buffet, the "Procter - Gillette merger is a dream deal," and in accordance with this firm conviction, Buffet supported the merger.

5. Success of the Procter&Gamble - Gillette M&a

The fusion between P&G and Gillette is considered by some specialists to have been the greatest transaction of 2005. The intense actions of the two board committees have made it possible for the two leading companies in care products to join forces and become the world's greatest consumer products manufacturer and seller.

The merger between P&G and Gillette resulted in a successful and large company that encompassed all advantages of the two companies and reduced risks and costs. The new company possess all specialized knowledge of women and family care assimilated by P&G along the years, and now, due to the merger, this knowledge is completed by specialized opinions and expertise in the field of men care products.

However, success did not come for free, and both companies had to pay a price. Procter&Gamble had to make significant financial efforts to finalize the investment and the joined company had to reduce their workforce with about 6000 employees, almost 4 per cent of the total number of workers. Most of the laid-offs belonged to Gillette.

The most relevant proof of the successful outcome of th merger between Procter&Gamble and Gillette is the significant growth in the company's revenues and shareholder's earning. "The company reported strong quarterly earnings, including a 12 per cent jump in net income to $2.04 billion, up from $1.8 billion in the same period a year ago. P&G's sales increased 7 per cent to $14.45 billion in the quarter."

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