Mergers and Acquisitions

Term Project

Group 3
Name Roll No.
Amrutha Baburaj PGP10007
Pratik Rungta PGP10038
Siddharth Pal PGP10051
Simran Verma PGP10052
Sudhir Pawar PGP10056
Suraj Chaudhary PGP10058

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The type of Merger
There are several types of mergers differentiated on the basis of industry of target and acquirer,
the size of firms, the method of acquiring and other host of factors. Analyzing the merger
between P&C and Gillette, we can say is as a ‘Horizontal Merger’. It is a kind of merger where
both the acquirer and the target belong to the same industry or are part of same supply chain.
Both of these firms belonged to the consumer product industry and had similar growth trajectory.
The merger created the world’s largest personal care and household products company. Global
Gillette was dissolved and incorporated into P&C other two main divisions, P&C Beauty and
Procter & Gamble Household Care. Gillette’s Brand and products were divided between the two
accordingly.

The rationale behind the merger

It was the decision of the CEO of Gillette that the two companies be merged to create one entity.
It was a shocking news as both these organisations were profit making and well established. The
decision of both the companies was to merge to make the largest consumer products company in
the world. Some of the strategic advantages from this merger were-

1. Brand Building- Approximately half of P&G sales came from Baby, Family and Household
categories, while the other half came from Beauty and Health businesses. The proposed merger
will finally make P&G a $22 Billion worth of brands company which will scale the business of
P&G.
2. Cost Savings- The deal will cut around 75% duplicate costs for the firm across various
departments. It involved reduction by about 4% of combined workforce of 140,000 employees.
The value of the planned cost savings was expected to be in the range of $14-16 Billion. The
combined company was expecting cost savings of more than $1 Bn by the third year after the
merger.
3. Better Negotiations- After consolidation, P&G with 16 brands having sales of more than $1
billion each and Gillette with major five brands was positioned to have better negotiation with
the mass retailers like Wal-Mart and Target for the all-important display space.
4. Geographic Synergies- As Gillette has dominance in markets like India and Brazil whereas
P&G had dominant market share in China. The merger opened the possibility for P&G to explore
new market areas and capture newer consumer segments.

Valuation of the Deal

The offer price of $54.05 per share was translated from 0.975 P&G shares for every share of
Gillette and was based on the closing price on January26, 2005. The price fell into the purview
of series of valuations prepared by the investment bankers which ranged from $43.25 to $61.90.
Another method set the price at $43.25 to $45 which comprised of valuation based on public
market points, including Gillette’s 52-week trading and a present value of wall street price
targets.
A discounted cash flow valuation made more sense and one valuation which incorporated cash
flows from Gillette in current form set the value at $47.10. Another valuation which took the

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potential cost savings from the merger valued the stock at $55.60. A third valuation considered
the total synergies valued the stock at $61.90 per share. The synergies considered in this
valuation were potential revenue synergies, increase in market power, higher negotiating power
with mass retailers as well. Lastly, a share price of $52.50 was established from sum-of-parts
valuation. The proposed merger was also compared with recent acquisitions to ensure that the
compensation being paid to Gillette shareholders was inline with the recent acquisitions. At the
implied offer price of $54.05, the transaction value turned out to be $57.17 billion.

Timeline of Events
November, 2004 Gillette approaches P&G with expected price range of $50-60 per share
Hiring of financial, legal and regulatory advisors
Due diligence concerning technology and businesses
December, 2004 P&D makes an offer of ~$50 per share (all stock exchange ratio of 0.915
of P&G share for each share of Gillette)
Gillette expresses its dissatisfaction with the valuation
Both parties agree to terminate the discussions
January, 2005 Goldman Sachs requests P&G to reconsider its position
Discussions recommence on 15th January
Both parties settle at a fixed exchange ratio of 0.975
Signing of the merger agreement on 27th January and issue of joint press
release on 28th January
3rd June, 2005 Filing SEC proxy statement to get shareholder’s vote
12th July, 2005 Shareholder’s vote
st
1 October, 2005 Transaction closes

The Deal
P&G acquisition of Gillette was a modified all-stock deal. P&G issued 0.975 shares of its stock
for each share of Gillette. Also, P&G announced that it would repurchase its stock worth $18-
$22 billion over 18 months. Considering buyback, the transaction was 60% stock and 40% cash
generated through AA- debt.
Through this deal, shareholders of both the companies were benefited. P&G determined that an
all-stock modified deal with a stock repurchase program would serve as a method to mitigate the
potential dilution of P&G’s earnings per share. Gillette shareholders benefited as it offered them
wholly tax-free transactions, and they could participate in the combined company or sell the
stock back to P&G for cash. Also, there was deal protection; a breakup fee of $1.9 billion (~3%
of the deal value) would be required to be paid by new acquirer if they terminate the deal.

Negotiations
On November 17, 2004, top management from Gillette and P&G met with UBS and Goldman
Sachs (representing Gillette) and Merrill Lynch (representing P&G) to discuss the companies'
merger. Post that, Lafley met with McKinsey & Company consultants to assess a combined firm.
The deal was about to close. However, the deal fell apart in early December 2004, mainly

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 because Gillette's leadership believed
that the valuation P&G had offered to
Gillette shareholders, $50 per share, was
too low. On January 4, 2005, Hank
Paulson (board chairman and CEO of
Goldman Sachs) called Lafley to remind
him of the merger's long-term strategic
value and asked P&G to reconsider its
offer.
Lafley then asked Rajat Gupta (former
M.D of McKinsey & Company) to phone
Kilts. The two met later to explore the possibility of reaching a consensus. They bridged the gap
successfully. Instead of the original offer (0.915 P&G shares for every Gillette share), Lafley
now offered 0.975 P&G shares for every Gillette share, which Kilts and Gillette board of
directors accepted.

Shareholder's Approval
Investors were skeptical about this acquisition. Gillette turned to Warren Buffett for assistance.
Considering that Buffett's reputation was so powerful in the investment community, Gillette's
BOD felt confident that his approval would ease investors' fears and result in a quick approval of
the deal. Buffett declared the transaction a "dream deal" that would "create the world's greatest
consumer products company. Buffett already held 10% of Gillette's stock. Warren Buffet said
that he would purchase additional stock of both Gillette and P&G so that, post the acquisition, he
would own 3.9% of P&G stock. His views and comments on this transaction seemed to calm
investors in both companies.

Regulations
Regulations start with SEC; each firm must disclose its plans to merge in a series of forms.
(Form 8-K and Form-425). These filings aim to notify investors. In Europe, EC, and in the
United States, FTC is responsible for approving transactions between public companies. They
investigated the possible effects of an M&A. FTC found anticompetition problems within adult
battery-powered toothbrushes, at-home teeth whitening products, and men's deodorant markets.
Post that, two companies began divesting themselves of business lines that might run afoul of
anticompetition laws. Gillette sold its Rembrandt teeth-whitening products to Johnson & Johnson
and its Right Guard, Soft & Dri, and Dry Idea deodorant brands to Dial P&G, for its part, sold its
Crest SpinBrush line to Church & Dwight.
Legal Process of Merger – Reverse Triangular Merger
A reverse triangular process of merger was followed. As per the terms of the proposed
acquisition, Aquarium Acquisition Corp., a wholly-owned subsidiary of P&G formed for the
purpose of this merger, was merged with Gillette. As a result, Gillette continued as the surviving
corporation and became a wholly-owned subsidiary of P&G upon completion of the merger
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process. Accordingly, Gillette shares were no longer traded publicly. Such an arrangement
provided various benefits such as continuity of the Gillette’s ongoing contracts and licenses,
faster execution of the merger process, and P&G could keep itself at a distance from Gillette’s
liabilities. Moreover, Gillette was able to maintain its identity and continued to operate
independently.
Post-merger scenario
 The overall effect of the merger has been that both the companies have been able to
benefit from each other. They have been able to adapt to each other’s cultures and
practices in the best way possible. But just like any other deal, this one too came at a cost.
Was this potential threat turned into an opportunity? Let’s find out. At a global level, the
merger proved financially beneficial to both the parties. P&G’s projected growth rate had
tripled while its sales stood at around USD 60 Billion for that year. Its per unit volume
and sales revenue was rose by 27%.
 From the marketing and distribution perspective, P&G changed the earlier ‘Go to Market
model’ with its ‘Golden Eye Distributor model’. According to the new model, the
company would operate through 30 distributors spread pan India, wherein the sales
officers would be on the distributor’s roll. The dealing with retail stores would be
handled by these distributors. The previous model involved a direct sales force on the
field, constituting about 190 Territory Sales In-Charges (TSI) and Area Sales Managers
(ASM). These were on the company’s payroll and worked with 700 distributors across
India. A change in the model meant 190 jobs becoming irrelevant and disengagement
with 700 distributors for Gillette India.
 Gillette wanted to ensure a secure future to the employees who were transitioned out due
to the merger. The initiative that it took was the first of its kind in its Industry.
 Firstly, the employees were made to feel a part of the change through an open and
transparent system of communication, removing all the laterals within the company.
 The next step was to provided severance packages to all employees transitioning out.
 It entered into a contract with Right Management Consultants to provide career
transitioning services wherein a 3-day fair was organized with all the blue-chip
companies visiting with better positions and package to offer. This fair brough 190
employees under 4 locations under one roof with 23 companies. Companies that would
not visit, were individually sent resumes after understanding their requirements. As a
result of this, all the employees had a job even before they left Gillette.
 The internal management played a huge role in helping its employees get past this phase
by not only providing career counselling on an individual basis but also, by helping them
in handling their anxiety and family issues during such times. The entire employee base
became a big family to help each other in such trying times.
 Finally, the company conducted trainings and workshops not only for the transitioning
employees but also for the ones that would be retained. These included intellectual
trainings involving coaching on how to improve self-marketability in the competitive

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industry outside, emotional trainings and landing support involving career guidance and
better self-assessments. It was due to these underlying efforts that the P&G and Gillette
merger is as we see it today.