Assessment of the Action of Gillette Company by Proctor and Gamble - Assignment Example

CASE STUDY Name: Course: Instructor: Institution: Location: Contents CASE STUDY 1 Executive summary 3 The case study is an in-depth assessment of the action of Gillette Company by Proctor and Gamble for reported $57 billion dollars. It delves into the negative and positive issues that were raised because of the merger. It explores the reason as to why the merger was successful compared to the fail Gillette takeover bid attempts of the 1980s. It examines the driving forces and synergies that propelled the companies to merger. It then evaluates the compensation package paid to Mr. Kilts the Gillette’s CEO. In addition, it examines the valuation of the deal together with its payment method. It goes on to discuss the conflicts of interest that the investment bankers that acted as the transacting advisers in the merger and at the same time were the same entities that prepared the fairness option. Finally, it outlines the concerns raised by the regulators and politicians with regard to the merger. 3 Question one 3 Question two 5 Question three 7 Question four 8 Question five 8 Question six 9 Conclusion 11 The analysis revealed the two firms had strengths in their market segments, which complemented each other. Both companies had world famous brands. These famous brands have made both multibillion-dollar consumer goods companies and the Merger will create the biggest consumer goods company in the world. Their combined force would allow the merged company to fair much better in negotiations with large retailers such as Target and Wal-Mart. The combined firm will able to have more control of product placement and pricing when negotiating with such large retailers. Both companies had products that appealed to all the segments of the market but they were particularly stronger in distinct gender segment. The experience the two different segments will complement the merger. In addition a combined company would capitalize on the marketing experience of both companies and would be able successful in reaching the male and female segments. In addition, the companies were stronger in different regions of the globe Gillette was particularly stronger in Brazil and India where as Proctor & Gamble was very strong in China, hence both companies would bring experience from different markets to the Merger. 11 Despite the fact that the deal had some minor issues with anti-trust and anti-competition laws and the management team was unable to gain the full support and cooperation all the stakeholders it was able to rely on the support of the Warren Buffet one of the most respected investors in our generation. In addition, Proctor and Gamble successfully convinced the Massachusetts public on the viability and benefits of the merger, which helped alley their fears on any possible layoffs in Gillette’s production facility located near Boston. Nonetheless, despite Warren Buffets support, the many potential synergies, and complementary strengths the deal still raised some eyebrows in both the main and wall streets. 12 References 12 Executive summary The case study is an in-depth assessment of the action of Gillette Company by Proctor and Gamble for reported $57 billion dollars. It delves into the negative and positive issues that were raised because of the merger. It explores the reason as to why the merger was successful compared to the fail Gillette takeover bid attempts of the 1980s. It examines the driving forces and synergies that propelled the companies to merger. It then evaluates the compensation package paid to Mr. Kilts the Gillette’s CEO. In addition, it examines the valuation of the deal together with its payment method. It goes on to discuss the conflicts of interest that the investment bankers that acted as the transacting advisers in the merger and at the same time were the same entities that prepared the fairness option. Finally, it outlines the concerns raised by the regulators and politicians with regard to the merger. Question one In the 1980s, Gillette successfully defended itself from several hostile takeover bids. A hostile takeover is a situation where a company is acquired or purchased against the consent or will of its board of directors. The process occurs when an individual or an institution purchases the shares of a company with a price, which is higher than that of the market, or with a bonus. Revlon Group Chairman Ronald O. Perelman who owed 13.8% of the company orchestrated the first takeover attempt by trying to buyout the rest of the shares at a higher price than that of the market. After negotiations between the boards of the two companies an agreement was reached, that Gillette would buy its own shares at a premium rate and a bonus payment. In return for the bonus payment, Revlon signed an agreement not to buy Gillette share for ten years. The other famous attempt was that of Coniston. In a heated proxy, battle Coniston, which had a small stake in the company-attempted buy out the Gillette by trying to win four seas in its board of directors. After its attempts were unsuccessful, it abandoned the bid after Gillette agreed to buy back its own share. The difference between the two takeover bids with that of the Procter and Gamble is that they were hostile takeover bids. There were several possible synergies and driving forces that necessitated the merger between Proctor & and Gamble and Gillette. Proctor &Gamble is famous for its consumer products as well as health and beauty products and owed a portfolio of over 150 brands. Gillette is famous and a world leader in the razor business, in addition, it controlled to other globally recognized brands Duracell batteries and oral-B toothpastes. These famous brands have made both multibillion-dollar consumer goods companies and the Merger will create the biggest consumer goods company in the world. Their combined force would allow the merged company to fair much better in negotiations with large retailers such as Target and Wal-Mart. The combined firm will able to have more control of product placement and pricing when negotiating with such large retailers. Although P & G sell both men and women’s products, it is particularly skilled at marketing women’s products with famous brands like always, and head and shoulders. On the other hand Gillette’s primary consumer segment was men, with its flagship brand Gillette razors and famous marketing lines like “The Best a Man Can Get”. Both companies had products that appealed to all the segments of the market but they were particularly stronger in distinct gender segment. The experience the two different segments will complement the merger. In addition a combined company would capitalize on the marketing experience of both companies and would be able successful in reaching the male and female segments. In addition, the companies were stronger in different regions of the globe Gillette was particularly stronger in Brazil and India where as Proctor & Gamble was very strong in China, hence both companies would bring experience from different markets to the Merger. Question two For successfully concluding the Merger between Gillette and P & G, both companies promised John Kilts a compensation package valued at more than 165 million dollars. In addition, P &G promised him stock options in its companies valued at 23 million in return for serving as the a vice-president in the newly merged company for one year. In total Kilts ended up earning almost 185 million, but the question in most people’s mind was the payout justifiable. The payout was very just. In his brief tenure as Gillette’s CEO, Kilts turned around the consumer products maker from a languishing and struggling company to one that Proctor & Gamble was willing to pay $57 billion. He unlocked the potential of the shaving products maker that had been restrained by previous management by demanding for more executive accountability, which allowed him to push the company to introduce new products like M3 Power razor that helped it fend off competition from its rivals. In simple terms, he earned his payout because he was able to create billions in share price value, which earned investors an eighteen percent premium on the company’s stock The package was in the best interest of the shareholders. Before Kilts arrival, Gillette profits were dwindling. Kilts arrived with a plan that enabled him revitalize the Duracell battery products line, improved the M3Power, vibrating men’s razor and high-tech brands through advertising, which allowed them to fend off competition from Schick’s Quattro razor. In addition, the company was able to post double-digit earnings in percentage terms for 12 quarters of the 13 quarters when kilts was CEO. The super earnings allowed the company’s value to rise by almost fifty percent. The sustained growth and kilts presence in the merger negotiations allowed the shareholders to get top dollar for their shares. Without kilts, presence in the merger process the value of the company would have been much lower. In financial terms, a collar used in many mergers and questions places a floor and a ceiling of the value of shares that changing hands to complete a transaction. A collar creates a definitive price range for the shares to allay the fears of shareholders regarding the fluctuation of the share prices before the transaction is complete. In the P & G and Gillette’s meager, a collar would be applicable because it was an all-stock 60/40 acquisition. In the merger transaction, P & G offered 0.975 shares of its own shares to Gillette shareholders for each share. This would allow the Gillette shareholder avoid paying tax, which is the case with cash transactions and at the same time would allow proctor and Gamble to maintain its cash reserves. By maintaining its cash reserves, the share price of P & G would not be affected. At the same time the deal required P $G to start buying back its 40% of shares with a period of 18 months. The deal not only sees the Gillette shareholders get back their return on investment tax-free and also gave them the option, to either continue investing in the new merged company or cash out. The fears of dilution the company’s shares by Proctor & Gamble shareholders would be allied given the company would be required to repurchase the shares back. The nature of the deal was framed in such manner that a collar would not be useful. Question three In mergers and acquisitions, there are three different ways in which the transactions can be completed namely all-stock, all-cash or a mixture of the two. All the options have both benefits and liabilities for both the purchaser (the buying company) and the seller (the purchased company). If the Gillette and proctor & Gamble merger were an all cash deal, P & G would have been required to pay Gillette’s shareholders a fixed price for their shares in cash. The beauty of an all cash transaction is its transparency and efficiency. Because Gillette’s shares were being acquired for a premium over its actual price, a cash transaction would bring instant gain for its shareholders and it would have allowed them to easily and quickly reinvest their newfound wealth. Nonetheless, an all-cash transaction would have negative implications for both Proctor & Gamble and Gillette. First, Gillette shareholders would be required to pay capital gains tax, which will affect their final earnings. Second, Proctor & Gamble would be required to deep into its cash reserves or take out a loan. This would adversely affect Proctor & Gamble’s stock price and bond rating, because credit rating agencies as very sensitive when a company significantly increases its debt or greatly depletes its cash reserves. Because an all-cash deal would have negative cash implications for Gillette’s shareholders and advantage consequences for Proctor & Gamble, the two companies could have as well settled for an all-stock transaction. With an all-stock deal, Proctor & Gamble would have been required to acquire Gillette by provide its shareholders its own shares and a stake of the company. The beauty of an all-stock deal is that Gillette’s shareholders would avoid paying tax while Proctor and Gamble would not have deplete its cash resources or take out a loan to complete the transaction. Nonetheless, all-stock deals have their own negative aspects. For instance, Gillette’s shareholders may not be interested in acquiring a stake in or hold back shares of Proctor and Gamble. Because before investing in a company’s stock it takes effort and time to evaluate the financial standing and future prospect of that company, a process that may of the Gillette’s shareholders may want to avoid. Second, Proctor & Gamble and its shareholders may raise concerns that the deal may reduce their share in the company or may dilute the value of the company’s shares in the marketplace. The best option, which both companies took, was a mixture of both cash and stock options. Question four The discounted cash flow analysis is a financial method used to establish the net present value of projected future cash flows available to investors net of the amount they are required to invest for generating the projected future growth. A valuation method utilized to evaluate the potential of an investment opportunity. It utilizes future cash flow projections and applies a discount to establish the present value, which is then used to evaluate the attractiveness of the investment. Question five Fairness opinions in mergers and acquisitions refers to a document prepared by investment banks and addressed to a company’s shareholders and other stakeholders during a mergers or acquisitions and it used to reassure the directors of the companies taking part in the acquisition, deal or merger that its shareholders are getting fair terms. The problem with fairness options is that it is very controversial because in financial and management circles it raises questions of conflict of interest and objectivity of the fairness in the opinion. There is conflict of interest when an entity in our case an investment bank renders an option and stands to benefit from this option given the fact that the same entity proposed the deal. The officers and directors of the company may also have a stake in the positive outcome of the said transaction. This was the case with the merger between the proctor & Gamble and Gillette. The head of Goldman Sachs Hank Paulson was the one directly responsible two bring the two parties together to the negotiation table but at the same time, its firm was among the investment banks that assisted in the transaction process and authored the fairness bank. At the end of the transaction, Goldman Sachs earned $30 million dollars its assistance in the merger and for drafting the fairness opinion. Question six In Many mergers and acquisitions, investors are torn between weather to sell, hold, or buy more shares. In the case of the proctor & Gamble and Gillette the deal worth over $50 billion dollars and ranked among the largest deals of all time had one of the best investors in United States backing it. After the deal Warren Buffet term it a dream deal and suggested that it has created the biggest consumer goods company in the world. After the deal warren buffet promised to buy more shares in the company During the negotiations of the merger, the deal came under scrutiny from the state of Massachusetts and secretary Galvan tried to investigate whether the sale of Gillette was contrary to the laws of the state. Gillette dealt with the issue of scrutiny caused by its acquisition attempts by bringing on board Warren Buffet, one of the most famous and trusted investors in the United States. Buffets role in the P&G and Gillette deal come from the fact that he had a long investment history with Gillette that goes back to the 1980s. In the 1980s, Gillette successfully defended itself from two hostile takeover bids, but in the process, it found itself staring at a $1 billion dollars debt. It financial situation made it a prime target fro a takeover bid. At the same time, the company had strong brands such as Gillette razor blades and Duracell that applied to Warren Buffet. In the late 80s, Buffet agreed to invest $600 million dollars in the company. The cash allowed the company to retire its debt and earn the company an investor with a proven record of accomplishments. With Buffet holding so many of the company’s share, a hostile takeover bid would not be successful without involving warren in the deal. This scenario was used as a an insurance policy to resist any hostile takeover bids During the merger transactions, Gillette turned to Warren Buffet a second time, but this time it was not to ask for additional funds but to ask Buffet to bless its impending union with Proctor & Gamble. Gillette board of directors knew that Buffet has a proven track record and a reputation in the investment world that an endorsement from him would reassure the company’s investors and share holders of the legitimacy of the merger and would entice them into approving it. Thus Warren Buffet played a very important role in the acquisition process; not only did he assure the state government of the legitimacy of the deal but also gave the investors hope of getting a good return on their investment once the merger was complete. Acquisitions and mergers usually come under scrutiny from regulator at different levels of the government. All public traded companies are required to declare its intentions to be acquired or to merger by filling a series of forms. The aim of filling the forms is to declare its intentions and to put its investors and shareholders on notice as to the important decision arrived by the board of directors. Once the information is in the public domain, regulators are given the leeway to scrutinize the transaction to ensure it achieves financial and economic fairness. In most cases when two companies with similar business models are set to merge they may be required to sell off some of its assets (sometimes-entire lines) to meet consumer-watchdog and antitrust rules and requirements raised by the United States federal regulators. In Europe, the European commission is responsible is the body responsible for approving mergers and acquisitions and they are mandated to investigate any deal before its conclusion. During the Proctor & Gamble and Gillette merger, the European Commission undertook an investigation to assess the effects the deal would have on consumers and employees, as a result forced the companies to dispose some of its brands in the European market. In the United States, the Federal trade commission is the body mandated to investigate the possible effects of Acquisitions and mergers. During the P &G and Gillette merger the commission initiated an investigation, which revealed that the merger might cause anti-competition issue especially with deodorant/anti-spray, battery powered toothbrushes, and teeth whitening markets. The commission ruled that the two companies the companies should dispose off the business lines that may the cause them to infringe on the anti-competition Conclusion The analysis revealed the two firms had strengths in their market segments, which complemented each other. Both companies had world famous brands. These famous brands have made both multibillion-dollar consumer goods companies and the Merger will create the biggest consumer goods company in the world. Their combined force would allow the merged company to fair much better in negotiations with large retailers such as Target and Wal-Mart. The combined firm will able to have more control of product placement and pricing when negotiating with such large retailers. Both companies had products that appealed to all the segments of the market but they were particularly stronger in distinct gender segment. The experience the two different segments will complement the merger. In addition a combined company would capitalize on the marketing experience of both companies and would be able successful in reaching the male and female segments. In addition, the companies were stronger in different regions of the globe Gillette was particularly stronger in Brazil and India where as Proctor & Gamble was very strong in China, hence both companies would bring experience from different markets to the Merger. Despite the fact that the deal had some minor issues with anti-trust and anti-competition laws and the management team was unable to gain the full support and cooperation all the stakeholders it was able to rely on the support of the Warren Buffet one of the most respected investors in our generation. In addition, Proctor and Gamble successfully convinced the Massachusetts public on the viability and benefits of the merger, which helped alley their fears on any possible layoffs in Gillette’s production facility located near Boston. Nonetheless, despite Warren Buffets support, the many potential synergies, and complementary strengths the deal still raised some eyebrows in both the main and wall streets. References Besanko, D. 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