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GROUP 2: Read the case, prepare the gist and give the answers of the discussion questions at the

end of the case. PROCTER & GAMBLE AND GILLETE Introduction Mergers and acquisitions (M&As) have been the buzz word in the last two decades. Not that there were no mergers happening earlier, but the last two decades have seen the numbers swell. The M&A activity has not remained confined to any particular industry, but has been quite widespread. One such M&A has been that of Procter & Gamble and Gillette. It has been the biggest merger in the history of consumer goods, and has changed the equations in the market. Procter and GambleA Look into the Past Procter & Gamble Home Products Ltd was incorporated as a 100% subsidiary of the Procter & Gamble Company, USA, in 1993 with the divestment of the detergents business. This was followed by a number of products such as Pantene Pro-V, Head & Shoulders shampoo and Tide detergent powderthe largest selling detergent in the world. This expansion continued when in June 2000 it launched Pantene Lively Clean stating that its unique pro-vitamin formula cleans oil-build up, dirt and grime in just one wash, delivering lively, free-flowing and sparkling-clean hair. This was followed with New Ariel Power Compact detergent claiming that its new global technologies breathe new life into clothes, by removing dinginess and restoring the original colour of the fabric. The product expansion continued with a wide variety of products being introduced in the market. Gillette IndiaThe Man's World Gillette India Ltd (GIL) was one of the premier FMCG (fast moving consumer goods) companies in India. It made a name for itself in the Indian market with products such as Gillette Mach3, Gillette Turbo, Oral-B, and Duracell. The company has constantly worked to bring out high quality, value-added products for the consumer. Gillette India Ltd was launched in 1985 as Indian Shaving Products Ltd. Later, the name of the company was changed to Gillette India Ltd. Gillette India offers a range of products for the consumer, ranging from 7 O'Clock Ejtek PII Shaving System, shaving creams, Gillette Presto Ready Shaver, 7 O'Clock Ready II, Oral-B, Gillette Sensor Excel Shaving System, shave foam, shave gel, aftershave splashes, deodorants, and conditioners. The company figured among the top 100 Indian companies in market capitalization very soon because of overwhelming response from the consumers.

The Growing Strength of Retailers The consumer goods industry grew rapidly from the 1950s through the 1980s, after which the growth slowed down. Slow sales growth, increasing cost of inputs, emergence of private labels, lower margins, difficult price negotiations, and the increasing diversity of channels, choices, and consumer types posed many difficulties for the $2 trillion plus industry. Retailers such as Wal-Mart, Kmart, and Sears Roebuck did everything possible to exert their purchasing power over suppliers to achieve lower prices. The main players who competed in the consumer goods industry were renowned names such as P&G, Colgate-Palmolive, L'Oreal, Kimberly Clark and Masco, Gillette, Revlon, Henkel, and Reckitt-Benckiser in the household and personal products category; Nestle, Unilever, Pepsico, ConAgra Foods, and Sara Lee dominated the food products segment; Johnson & Johnson was a big player in the healthcare category. The increasing competition had made promotional offers a norm in the industry and advertising and marketing costs increased due to stiff competition. In 1999, P&G had approached Gillette with a takeover proposal, but Gillette had turned down the offer. When P&G approached Gillette again in November 2004, the company showed interest in the offer, raising eyebrows in the market. Very few realized that the offer was a compulsion rather than choice, because marketing pressures forced companies to diversify. Consolidation was perceived to be the only way to survive the difficult times. The merger was also necessitated by the fact that consumer goods companies wanted to be at par with retailers, who had acquired considerable bargaining power. The only fear was the concern about P&G handling the risk accompanying the merger, for it had not undertaken such a big merger in its 168-year-old history. Integration was expected to be a huge challenge for the workforce as the cultures differed immensely. The merger would also call for a massive layoff across countries. The Merger Cincinnati-based P&G announced its decision to acquire Boston-based Gillette for $57 billion, setting the stage for becoming the world's largest consumer products company with annual sales of $60.7 billion. The new company would overtake Unilever, which had sales of $48.25 billion in 2003. The company would become a $21-billion brand with a market capitalization of $200 billion after the merger. The CEOs of both the companies felt that the deal was a friendly move, which would benefit both of them equally. The analysts also favoured the deal as they felt the merging companies had many similarities in corporate history they

were both more than a century old, had billion-dollar brands, and were pioneers in consumer product marketing initiatives. The merger was based on a different model where the focus was on innovation rather than on scale. It was a unique case of acquisition by an innovative company to expand its product line by acquiring another innovative company. The Deal The deal had the following features: P&G would pay $0,975 for each share of Gillette, valuing the acquisition at a 20% premium. P&G agreed to pay Gillette 40% in cash and 60% in stock. The shareholders of P&G were a little apprehensive that the deal would dilute the company's share prices. To avoid this, P&G promised to buy back its shares, worth $18$22 billion, over the next 12-18 months. Critics felt that the 20% premium paid by P&G for Gillette's stock would make it difficult for the company to pay dividends to shareholders. Why Gillette? This was a question in the mind of every individual, irrespective of whether he/ she was involved in the deal. The answer was not difficult to find: P&G was strong in women's personal care products while Gillette's strength was in men's grooming category. Gillette's stock had climbed 50% since 2003 on account of jump in profits on premium products. It was estimated that the acquisitions would add about 20% to P&G sales and the long-term sales would grow by an estimated 5~7% a year. This would increase the operating margin by 25% by 2015 from 19% in 2003. The companies also expected cost savings of $ 14-16 billion from combining back-office operations and exploring new growth opportunities. The merger would provide the companies with the resources needed for intensive collaborative of supply chain initiatives in a more cost-effective way. The merger would also bring down the advertising and media costs owing to greater bargaining power. Gillette, it was felt, would give exposure to P&G in emerging economies such as India and Brazil, while P&G would distribute Gillette products in China. The acquisition would give P&G the much-needed boost to further strengthen its product categories where at present it has negligible presence. The deal would help Gillette in improving its inventory days.

Given these reasons, it was surely going to be a win-win situation for both the companies. The Concerns The merger raised certain concerns and analysts felt that the product overlaps would make it difficult for the merged company to set prices. Again, the strong overlaps in toothbrushes and toothpaste would mean the regulators would seek some divestitures. Another view was that the company would overcome the regulatory hurdles because the products were sold to different customers. In addition, creating regulatory hurdles would prevent US companies from expanding, as it would make them vulnerable to foreign competition. Objections were expected from the European Union antitrust regulators as the deal would give the merged company added strength in the overseas market. Another fear was that P&G would face the risk of not being able to concentrate on its functioning due to the demands of the integration effort. It was felt that the formulation of country-specific strategies for the combined firm could take considerable time. Critics also pointed out that P&G already had some in-process integration of Wella, Germany's leading cosmetic supplier that it had acquired in 2003, which could divert the management's attention and energies away from the current integration. Integration Issues The integration of P&G and Gillette necessitated by the acquisition was a big challenge. It was expected that the merger would result in around 6,000 job cuts, equivalent to 4% of the two companies' combined workforce of 140,000. This was required to eliminate management overlaps and consolidate business support functions. Fortunately, the two entities did not face cultural problems because of their geographical proximity. Another matter of concern was that P&G was considered a promote-from-within company, and already had a lot of executive talent at the top. Therefore, absorbing Gillette's management to their satisfaction could be difficult. P&G's ability to handle this massive cultural assimilation would decide the success or failure of this acquisition. Finally, there were brands that overlapped with each other's product portfolio. Future Outlook In spite of all the concerns and problems anticipated, the two companies went ahead with the merger. The two entities took the bold view that problems would remain, and that they should not worry too much about them. Rather than foreseeing too many problems in advance and worrying about their solutions, they decided to cross the bridge when they came to it.

The merged entity was expected to face pressure from competitors in the industry, but the only way to handle it was by launching new products and or strengthening the supply chain relationships. P&GGillette, it was felt, could be a transformative deal for the industry because of Gillette's growth potential. Analysts forecast that this deal could lead to further consolidation in the industry. Conclusion The two companies finally decided to work together and explore the growth the industry had to offer, rather than worrying too much about what critics had to say and what regulators felt. The merged entity is doing well and growing with every passing day.

Discussion Question 1. Critically analyse the merger. What were the concerns raised in the merger? 2. What solutions do you feel would be needed to address the concerns?

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