Procter & Gamble Company Merger Case Study

The project deals with the analysis of mergers and acquisitions in an FMCG sector. Products which have a quick turnover, and relatively low cost are known as Fast Moving Consumer Goods (FMCG). FMCG products are those that get replaced within a year. A merger is the combining of two or more companies, generally by offering the stockholders of one company securities in the acquiring company in exchange for the surrender of their stock. This project deals with the merger of Procter & Gamble and Gillette, acquisition of Balsara’s hygiene and home product by Dabur and Acquisition of Nihar brand from HLL by Marico.

The methodology deals with the various ways in which the data for this project was collected. Due to the limited scope of information and time constraints, secondary and not primary data sources has been used including journals, articles, reference sites, etc. The project guide proved very vital in the successful completion of my report.

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The next section deals with the individual introduction of both companies involved in the process of merger. It further includes the different terms of the merger and various synergies created through the merger. Furthermore the next section deals with scenario after the merger and analysis of financial statements of acquiring company post merger.

Building a brand from scratch in the FMCG space can be quite an expensive exercise. Mature categories such as personal care or household products are already dominated by one or two strong incumbents and wresting market share away from them is quite a challenge. With growth rates in markets such as skin care, hair care and household products suddenly moving into high gear, companies also cannot afford to lose time on the trial-and-error method that usually accompanies new launches.

Given this scenario, domestic players seem to view brand acquisitions and mergers as the quickest way to step into new categories and acquire a well-rounded product basket, without squandering their surpluses on brand-building expenses. Market shares apart, many of the buyouts have been motivated by the need to acquire better distribution reach whether within India or overseas.

Introduction

I. MERGER

A merger is the combining of two or more companies, generally by offering the stockholders of one company securities in the acquiring company in exchange for the surrender of their stock. A merger occurs when two or more companies combines and the resulting firm maintains the identity of one of the firms. One or more companies may merge with an existing company or they may merge to form a new company. Usually the assets and liabilities of the smaller firms are merged into those of larger firms. Merger may take two forms-

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1. Merger through absorption
2. Merger through consolidation.

Absorption:

Absorption is a combination of two or more companies into an existing company. All companies except one lose their identity in a merger through absorption.

Consolidation:

A consolidation is a combination if two or more combines into a new company. In this form of merger all companies are legally dissolved and a new entity is created. In consolidation the acquired company transfers its assets, liabilities and share of the acquiring company for cash or exchange of assets.

II. ACQUISITION

A fundamental characteristic of merger is that the acquiring company takes over the ownership of other companies and combines their operations with its own operations. An acquisition may be defined as an act of acquiring effective control by one company over the assets or management of another company without any combination of companies.

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III. TAKEOVER

A takeover may also be defined as obtaining control over management of a company by another company.Merger of Procter & Gamble Company and Gillette CompanyAbout the merging companies:

Procter & Gamble

Procter & Gamble Company

is asoap opera. P&G was named 2008 Advertiser of the Year by Cannes International Advertising Festival.

Effective July 1, 2007, the company’s operations are categorized into three “Global Business Units” with each Global Business Unit divided into “Business Segments” according to the company’s March 2009 earnings release.

• Beauty Care
• Beauty segment
• Grooming segment
• Household Care
• Baby Care and Family Care segment
• Fabric Care and Home Care segment
• Health and Well-Being
• Health Care segment
• Snacks, Coffee, and Pet Care segment

P&G has gone into an aggressive mode. It has launched two new variants on 2nd Dec 2009, one in the detergent segment, which is called ‘Tide Naturals’ and also another one in skin care segment under the ‘Olay’ brand.

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Gillette Company

The Gillette Company is a globally focused consumer products marketer that seeks competitive advantage in quality, value-added personal care and personal use products. It is the world leader in the men’s grooming product category as well as in certain women’s grooming products. Although more than half of company profits are still derived from shaving equipment–the area in which the company started–Gillette has also attained the top spots worldwide in writing instruments (Paper Mate, Parker, and Waterman brands) and correction products (Liquid Paper), toothbrushes and other oral care products (Oral-B), and alkaline batteries (Duracell products, which generate almost one-fourth of company profits). 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.

The Merger:

On October 1, 2005, Procter & Gamble finalized its purchase of The Gillette Company. As a result of this merger, the Gillette Company no longer exists. Its last day of market trading – symbol G on theOral-B, among others, which have also been maintained by P&G.

The Terms of the Merger:

Date of merger:

The merger came into effect from July 1st, 2007.

The new company formed

: The Gillette Company’s assets were initially incorporated into a P&G unit known internally as “Global Gillette”. In July 2007, Global Gillette was dissolved and incorporated into Procter & Gamble’s other two main divisions, Procter & Gamble Beauty and Procter & Gamble Household Care. Gillette’s brands and products were divided between the two accordingly.

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The Share Swap Ratio

: Under the deal announced, Procter & Gamble will pay 0.975 share of its common stock for each share of Gillette common stock. On Wall Street, shares in Gillette closed up nearly 13%, while P&G slid 2.1% after the announcement.

The Management:

Gillette’s chief executive James Kilts is to join the board of the merged company, becoming P&G vice chairman, while P&G chief executive A.G. Lafley will remain chief executive of the merged company.

Examining the merger:

Type of merger:

Procter & Gamble being number one in consumer products went into acquiring and merging with other companies like, Germany’s Wella AG hair care line in 2003 and it also acquired Clairol for its hair-care lines and Iams Co. for its pet foods. The merger in question; between Procter & Gamble and Gillette is thus a merger where the acquiring company is expanding in size of operations and also product offerings. This is thus a

horizontal merger.

Operational Synergies of the merger:

The merger of the two companies will create “the world’s largest consumer products conglomerate.” Both companies are strong, diversified companies, so one wonders what uncaptured synergies there could be here. P&G is adept at taking innovations from one product and transferring it to another product, so there may be opportunities to improve existing Gillette products. In addition, the companies are stating that the merger will give them more negotiating power with the most powerful buyer of consumer products. The deal would give the company even more control over shelf space at the nation’s retailers and grocers, real estate that is at a premium. Executives at the companies said they believe they’ll both be able to grow faster together than separately, with P&G opening doors for Gillette in markets such as China and Japan while Gillette bringing P&G some product segments that are growing faster than the company’s overall current portfolio of products.The merger will make P&G the world’s biggest household goods maker, pushing Unilever into second place

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Financial Synergies:

The merger would create a company with revenues of more than Rs.2700 billion that would have even greater clout against mass-market retailers like Wal-Mart Stores Inc., which have been pressuring consumer product suppliers to keep costs low. Because of expectations from the deal, P&G raised the annual revenue growth outlook to 5 to 7 percent, rather than its earlier target of 4 to 6 percent. The companies said they expected cost savings and synergies of about Rs.630 billion to Rs.720 billion US over three years. P&G and Gillette’s combined market capitalization of about Rs 8325 billion US, would be by far the largest in the FMCG sector.

HR Synergies:

As part of the cost-cutting that would follow the deal, the merger would result in the elimination of about 6,000 jobs, or 4 percent of the combined work force of about 140,000. It said most of the cuts would come from eliminating management overlaps and consolidation of business support functions. Gillette’s chief executive James Kilts is to join the board of the merged company, becoming P&G vice chairman, while P&G chief executive A.G. Lafley will remain chief executive of the merged company.

Scenario Post Merger:

Procter & Gamble is the world’s largest producer of household and personal products by revenue, with its products reaching 4 billion people worldwide and its product line includes 23 brands across beauty, healthcare, and food including Tide detergent, Pampers diapers, and Gillette razors, that generate over $1 billion in revenue annually, with the company’s total revenue at Rs.3555 billion in 2009.In 2005, P&G expanded its portfolio to include razors and blades as well as batteries with its acquisition of the Gillette Company.The company’s 2010 first quarter net income fell 1% to Rs.148.95 billion (Rs.46.35 per share) as higher prices offset lower sales volumes and foreign exchange effects, beating analyst expectations of Rs.43.65 per share. Revenue fell 6% to Rs.891.45 billion, though organic sales rose 2%.

One of the key areas of growth for the company is in emerging markets worldwide. Sales in developing nations have increased steadily from 20% of total revenue in 2002 to 32% in 2009.P&G already owns large and growing market share in countries includingglobal economic downturn, P&G has announced it will focus its growth strategy on emerging markets, opening almost all of its 20 new manufacturing facilities outside its established markets.

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Procter & Gamble attempts to maintain its competitive edge by focusing on product innovation. To this end, P&G spends almost twice as much on research and development spending Rs.90 billion in 2009 as its closest competitor, Unilever, spent about Rs.58.5 billion USD in 2008.Through its”Connect + Develop”initiative, P&G looks to bring in new product ideas from outside the company. Connect + Develop has led to the development of 42% of new P&G products in recent years.

In fiscal 2009, P&G’s Net sales fell 3% to Rs.3555 billion driven by a 3% decline in unit volume and a 4% decline in net sales from the rising US dollar. Organic sales, a closely watched figure which excludes the impact of acquisitions, divestitures, andforeign exchange, increased 2%, which is below its target organic sales range of 4-6%.Earnings for fiscal 2009 increased 11% to Rs.603 billion.

In July 2009, CEO A.G. Lafley stepped down from his post after 29 years with Proctor & Gamble.He was succeeded by current COO Bob McDonald.The company expects sales to be up 0 to 3% in fiscal 2010,with sales back up in the fall of 2009, fed by price cuts, new products, and value-focused promotions.

P&G divides its business into three

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Global Business Units

(GBUs) that develop and produce products and its corporate group which handles the operation and administration of the company.

• Beauty (33% of 2009 sales, 36% of 2009 net income):

  The Beauty GBU includes all hair and skin products, medications, razors, electric shavers, and batteries. This business unit includes several product lines acquired when the P&G bought consumer products company Gillette in 2005. Proctor & Gamble’s global market share in blades and razors is 70%, primarily centered on its Mach3, Fusion, Venus, and Gillette brands.In June 2009, P&G further expanded its men’s grooming business with the acquisition of the high-end shaving company “The Art of Shaving” and the men’s skin care line Zirh.

  Health and Well-Being (21% of 2009 sales, 24% of 2009 net income):

  The Health and Well-Being GBU provide oral care, feminine health, pharmaceuticals, snacks, coffee, and pet care products. In oral care, the company has the number two market share position at 20% globally.In potato chips, the company’s Pringles brand holds a market share of approximately 10%.

  Household Care (46.8% of 2009 sales, 43% of 2009 net income):

  The Household Care GBU manufactures a wide range of products from laundry detergent to diapers. The company’s baby care market share in 2008 was 29%.

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  Post mergersegment wise information of Procter & Gamble Company
  	Net Sales (Rs. M)	% Total Sales	Net Earnings (Rs. M)	% Total Earnings	Sales Growth from 2008	Billion-Dollar Brand(s)
  Beauty	845505	23.6%	113895	22%	-3.72%	Head & Shoulders, Olay, Pantene, Wella
  Grooming	339435	9.5%	67140	13%	-8.61%	Gillette, MACH3, Braun, Fusion
  Health Care	613035	17.1%	109575	22%	-6.55%	Actonel, Always, Crest, Oral-B
  Snacks, Coffee, and Pet Care	140130	3.9%	10530	2%	-35.82%	Iams, Pringles
  Fabric and Home Care	1043370	29.1%	136440	27%	-2.71%	Ariel, Dawn, Downy, Tide, Duracell, Gain
  Baby and Family Care	634635	17.7%	79650	16%	1.48%	Bounty, Charmin, Pampers
  Corporate	-59805	-1.7%	-9045	-2%	-6.74%
  TOTAL	3588660	99.1%	508185	100%	-4.50%	23 brands over $1B

  Business Growth and Divestitures

  Folgers Sale

  On June 4, 2008, P&G sold its Folgers coffee unit toJ.M. Smucker Companyfor Rs.132.75 billion.As part of the deal, P&G shareholders will receive a 53.5 percent stake in Smuckers and the company will assume Rs.15750 million of Folger’s debt.

  Gillette Acquisition

  Procter & Gamble acquired Gillette in 2005 for over Rs.2250 billion in its largest acquisition to date. In 2004, the last full year before the acquisition, Gillette generated over Rs.450 billion in sales, about Rs.270 billion of which came from razors and Duracell and Braun products and the remainder sourced from the Oral-B brand, which was moved into the Health & Well-Being segment. A key piece of the acquisition beyond Gillette’s product lines was its distribution network and supply chain. Gillette’s distribution network and supply chain in emerging markets had been extremely successful for Gillette and, once acquired, has worked to complement P&G’s own distribution network.

  Sale of Pharmaceutical Unit

  In 2009 P&G sold its pharmaceutical unit to Warner Chilcott Plc for Rs.139.5 billion in cash.The company expects to book a 43 cent per share earnings boost in Q2 of fiscal 2010 as a result of the sale.The deal allows P&G to focus on its personal care, beauty, and household product divisions. In 2006, the company started winding down its discover-phase pharmaceutical products in favor of licensing late-stage compounds, and announced in 2008 it would exit the drug industry entirely.

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  PG 2008 Net sales by Geographic Region(Post merger)

  P&G has a well-established market presence in developed countries such as the United States and Western Europe and is looking to its presence in emerging markets. In fiscal 2009, 32% of total net sales came from developing nations,a figure that has increased steadily from 2002 when sales in developing nations accounted for only about 20% of total revenue (approximately Rs.360 billion).

  In China and Russia, P&G’s market share has been consistently increasing in the past five years as Procter & Gamble has put an increased emphasis on establishing its products in those markets. In 2008, the company’s distribution network reached 800 million people in China and 80% of the population in Russia. P&G has created products designed specifically to target developing nations. The average Mexican spends about Rs.9000 a year on P&G products, Chinese per-capita spending is only about Rs.135 and India per-capita spending Rs.45.Increasing sales in China and India to the levels in Mexico would add Rs.1800 billion in sales to the company’s overall revenue.

  Research & Development focuses both inside and outside the company

  In 2009, P&G spent approximately Rs.91.8 billion on Research & Development, nearly Rs.45 billion more than its closest competitor, Unilever.The two most important factors in P&G’s innovation process are its practice of consumer demand research and its “Connect and Develop” R&D structure. First, when entering new markets, P&G sets up in-home visits with consumers in order to fully understand the needs and desires consumers have for household and personal products. This way, P&G gets directly to its customers and is able to cater to their needs. P&G also incorporates consumers’ input into the R&D process through its “Connect and Develop” initiative. Through “Connect and Develop” P&G has an online interface set up where people can submit product ideas and provide input on topics that P&G places on the web-portal. P&G staff then sorts through the ideas and work with the most promising ones. This process is not responsible for the entire R&D that P&G does, but approximately 42% of new products in the last several years were influenced by or originated from “Connect and Develop.

  Tide Stain Release, a stain-removing detergent released in July 2009, has garnered 10% market share in the US as of November 2009.The Bounce Dryer Bar, an automatic laundry freshener released in August 2009, has captured 7% of the North American fabric sheet market as of November 2009.

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  Commodity Prices

  A diversified consumer products manufacturer, P&G depends heavily on a wide basket of global commodities for manufacturing its goods, the prices for which have risen nearly 50% since 2002. Nearly half of the company’s cost of goods is directly related to commodity goods. The company has increased prices due to higher costs of oil and other raw materials. In its conference call, the company stated that it expected raw material costs to increase Rs.135 billion in 2009.The company has raised prices on Cascade dishwashing detergent, Iams pet food, and Gillette razors to counter the increasing cost of oil in the first half of 2008.P&G instituted broad price adjustments in Q1 2010 to close widening price gaps in several businessesincluding North American laundry, tissue, andtowel, and several Eastern European markets.

  Competition

  Procter & Gamble provides the broadest and biggest portfolio of products in the household and personal care industry with 24 billion-dollar brands. P&G generates 43% more revenue than its closest competitor,L’Oreal, and Reckitt Benckiser.

  Procter & Gamble Competitors(2006-2007)
  	Revenue (Rs. M)	Net income (Rs. M)	Operating Margin	R&D Spending (Rs. M)	R&D as % of Total Revenue	Revenue Growth from 2006/2007*	Major Brands/Products
  Procter & Gamble	3757635	543375	20.46%	100170	2.67%	9.00%	Pantene, Crest, Tide, Downy, Bounty, Folgers, Gillette, Duracell
  Unilever NV (UN)	2632860	270990	13.05%	56880	2.16%	1.37%	AXE, Lipton, Slim-Fast, Vaseline, Dove, Ben & Jerry’s
  Clorox Company (CLX)	237285	20745	13.14%	4995	2.11%	8.79%	Clorox Laundry Bleach, Pine-Sol Cleaner, Glad Plastic Bags, Brita Water Filters
  Kimberly-Clark (KMB)	821970	81990	14.32%	12465	1.52%	9.07%	Huggies Diapers, Kleenex Tissue, Scott Paper Towels
  Colgate-Palmolive Company (CL)	620550	78165	19.24%	11115	1.79%	12.68%	Colgate Toothpaste, Colgate Toothbrushes, Irish Spring Soap, Palmolive Soap, SpeedStick Deodorant
  L’oreal (LRLCY)	1117890	174150	20.21%	36675	3.28%	8.06%	Garnier Fructis, L’Oreal Paris, Maybelline, Ralph Lauren

  Here are somekey factsabout the two firms.

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  1. Cincinnati-based Procter & Gamble was established in 1837 and made its name selling soap and candles to U.S. government soldiers during the civil war.
  2. Boston-based Gillette spends around Rs.2700 million annually on advertising.
  3. In May the razor-maker paid a reported 40 million pounds (Rs.3393 million) to sign international soccer star David Beckham to a three-year deal as its global face.
  4. Procter & Gamble employs a workforce of 110,000 worldwide and has a market capitalization of Rs.6345 billion. Gillette employs 29,400 employees worldwide and has a market capitalization of Rs.2025 billion.
  5. Gillette’s profit beat market expectations last October after Hurricane Ivan spurred the buying of Duracell batteries.

  Limitations:

  Due to lack of data the financial statements analysis of Procter & Gamble was not carried out.

  Conclusion

  Thus the acquisition and integration of Gillette was the largest and most successful in the history of Procter & Gamble. P&G acquired Gillette, which is best known for its shaving products, in 2005 for Rs.2565 billion. The merger between Procter & Gamble and Gillette is a horizontal merger where the acquiring company is expanding in size of operations and also product offerings. The merger created various synergies like financial, operation and human resource synergies. After the merger Procter & Gamble integrated systems in 26 countries, spanning five geographic regions, representing about 20% of sales. Gillette is a catalyst that makes P&G a better brand-builder and a stronger innovation leader. There is no doubt that P&G and Gillette are stronger together than alone, and both the companies together can deliver accelerated growth targets over the balance of the decade. Acquisition of Balsara’shygiene and home product by Dabur

  About the merging companies:

  Dabur Company

  Dabur India Limitedis the fourth largest FMCG Company in India and Dabur had a turnover of approximately Rs.2,834 Crore & Market Capitalisation of over Rs 10,000 Crore, with brands like Dabur Amla, Dabur Chyawanprash, Vatika, Hajmola and Real. The company has kept an eye on new generations of customers with a range of products that cater to a modern lifestyle, while managing not to alienate earlier generations of loyal customers. Dabur has global presence in 50 countries; products are available in the markets of Middle East, South-East Asia, Africa, the European Union andAmerica.

  Dabur is an investor friendly brand as its financial performance shows. The company’s growth rate rose from 10% to 40%. The expected growth rate for two years was two-fold. There’s a great sense of responsibility for investors’ funds on view. This is a direct extension of Dabur’s philosophy of taking care of its constituents and it adds to the sense of trust for the brand overall.

  The company, through Dabur Pharma Ltd. does toxicology tests and markets ayurvedic medicines in a scientific manner. They have researched new medicines which will find use in O.T. all over the country therein opening a new market. Dabur Foods, a subsidiary of Dabur India is expecting to grow at 25%. Its brands of juices, namely, Real and Active, together make it the market leader in the Fruit Juice Category. Dabur Ranked AmongIndia’s Most Trusted Brands of 2007 By Economic Times-Brand Equity.

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  Products of Dabur

  Ø Under

  health care

  products it has brands like Hajmola, Pudin Hara, Dabur Chyawanprash, Glucose D, Dabur Lal tail,etc.

  Ø In

  home care

  range consist of product like Odinil,Odomos,odopic,etc.

  Ø Under

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  personal care

  range it has product like Vatika,Gulabri,Dabur Red Toothpaste,etc.

  Ø In

  food range

  it has brands like Real Active ,HOMMADE-range of ready made pastes, soups, coconut milk & tomato puree

  Ø Dabur has guar gum plant,a natural gum used in foods & industrial applications.

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  Ø Dabur also produces ayurvedic medicines.

  Balsara Company

  The Balsara Group manufactures and markets its products, in India and Internationally. The Group has a domestic annual sales turnover of Indian Rs. 2 billion, and a rapidly growing international sales turnover of Indian Rs. 350 million. The Group is professionally managed, with manufacturing, sales, distribution and administrative facilities located throughout India, in addition to its international operations.

  In the Indian market, 60% of the Balsara Group’s sales turnover of Indian Rs. 2 billion comes from Personal Hygiene Products (Promise, Babool and Meswak oral care ranges) and 40% is derived from Household Products (Odomos insect repellents, Odonil Air Fresheners, Sani Fresh toilet cleaners and Odopic dish washing products). Balsara has a wide national sales and distribution system that makes products available in 10, 54,000 retail outlets. The system is supported by a distribution network of 4 Zonal Offices, 13 Branches, 24 Regional Warehouses, and 1700 Distributors in 1500 towns.

  The mission of the Balsara Group of Companies is to be a leading provider of superior quality personal and household products, ingredients and packaging materials to consumers and customers on the Indian sub-continent and throughout the world.

  The Acquisition:

  On January 27, 2005 Dabur India today announced the acquisition of Balsara Hygeine and Home Care businesses for Rs. 143 crores and said it would look at more buyouts to capitalise on the consolidation in the sector.

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  The company board of Dabur approved the acquisition of controlling stake in three Balsara group companies Balsara Hygiene Products, Balsara Home Products and Besta Cosmectics. With the acquisition of the Rs. 143-crore Balsara Group in an all cash deal, Dabur India will have oral care brands such as Promise, Babool, Meswak; mosquito repellents such as Odomos and household products such as Odonil and Odopic under its fold.

  Dabur India will acquire the entire promoters’ stake in the three companies 99.4 per cent in Balsara Hygiene, 100 per cent in Balsara Home Products and 97.9 per cent in Besta Cosmetics.

  The Terms of the Acquisition:

  Date of the acquisition:

  The merger came into effect from 1st April 2006.

  The new company formed

  : According to the deal Dabur will take full control of Balsara’s entire brand portfolio which consists of oral care brands like Promise, Babool, Meswak; mosquito repellants like Odomos and household products like Odonil, Odopic. The deal also includes takeover of Balsara’s operations consisting of three manufacturing facilities at Kanpur, Silvassa and Baddi and about 600 employees. Dabur India will also acquire the entire promoters’ stake in the three companies 99.4 per cent in Balsara Hygiene, 100 per cent in Balsara Home Products and 97.9 per cent in Besta Cosmetics.

  The Share Swap Ratio

  : Under the deal announced, Dabur India Ltd will acquire Balsara’s hygiene and home product businesses in an Rs 143 crore all-cash deal. While Rs 120 crore will be funded through internal accruals, the balance Rs 23 crore will be raised through debt.

  Examining the Acquisition:

  Type of merger:

  The Rs 1,300-crore fast-moving consumer goods major Dabur India acquired Mum

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