P&G's businesses were organized into three product based segments: household care, health, baby and family care, and beauty care. P&G became a national consumer products company with 30 brands and production facilities across the US and Canada by 1890. P&G also experienced an increase of more than 40% in their revenues between 2001 and 2005. In 2005, P&G executed its largest acquisition with the takeover of Gillette Company.
I. Reasons for P&G's Acquisition of Gillette
A) Companies have complementary strengths in product innovation and selling activities
P&G has a distribution system that is internationally spread out as compared to Gillette. Management is expected to take Gillette products into developing markets such as China that were served by P&G, but not Gillette immediately after the merger. P&G and Gillette also plan to share their R&D costs to further develop their products to better suit their customer's needs.
B) Stronger lineup of brands
Gillette was a well-known brand in the razor market and it also has a 70% market share in the global razor market. It has a strong competitive position and Gillette has been successful in persuading their customers to trade up to higher-price-point personal care items. Gillette's customers also tended to be highly loyal. Acquisition of Gillette will definitely provide a competitive edge to P&G as Gillette is will provide a stronger lineup of brands to P&G in the consumer products industry.
C) Generate additional opportunities for economies of scale
Gillette has a huge market share on its own while P&G has an internationally spread out distribution system. Combining these companies' strengths together will enable both P&G and Gillette to reduce per unit cost by achieving economies of scale.
D) Enhance relationships and bargaining power with retail buyers
The strong competitive position that Gillette has in the consumer products industry will increase the bargaining power that P&G has over its retail buyers. P&G will be able to strengthen their market position through this acquisition. A stronger brand portfolio would also definitely help enhance relationships.
II. Ways to Generate Expected Synergies
Layoffs are generally expected when a company undergoes merger and acquisitions. It is estimated that about 4% of the total combined workforce will be laid off due to this acquisition. This is to remove management overlaps due to merging operations in more than 80 countries across the world. These lay-offs will not only come from Gillette's former operations, but also Procter and Gamble's management.
B) Business Elimination
Since both Gillette and P&G are operating in the consumer goods segment, they tend to have a few products that overlap each other. Both Gillette and P&G have to sell off some of their product line to remove this overlapping and generate synergy between them. The integration of the companies' product line is important to ensure synergy exists between them and non-profitable products are removed from their product line.
III. Financial Analysis of P&G
Profit margin for P&G was pretty low from years 2000-2004. P&G experienced an increase in their profit margin after 2001. Gillette on the other hand, had a steadily increasing profit margin since 2000. They also had a higher profit margin as compared to P&G.
This indicates that Gillette's performance has been increasing steadily since 2000 and they have been experiencing increase in their sales and net earnings yearly. P&G has much higher sales and net earnings as compared to Gillette due to their internationally dispersed distribution system. However, P&G is still unable to match Gillette's profit margin performance which is higher than P&G.
The FCF productivity of P&G increased from 2000 to 2002 and then decreased from 2002 onwards. Gillette on the other hand, experienced a decline from 2000 to 2002, a short increase from 2002 to 2003 and then a decline again from 2003 onwards.
This indicates that both Gillette and P&G do not have much free cash flow in their company. However, P&G's free cash flow performance has been much better as compared to Gillette's performance. This low free cash flow may pose a problem to P&G to acquire Gillette.
P&G has much more free cash flows as compared to Gillette and this can definitely help Gillette improve their free cash flow productivity performance. However, the acquisition price offered for Gillette was $57 billion which is really high and would definitely affect P&G's free cash flow productivity performance.
IV. Conclusions and Recommendations
Even though the free cash flows may pose a problem in the acquisition of Gillette, I believe that P&G should still acquire Gillette as Gillette can definitely help improve P&G's financial performance and help provide P&G with a competitive edge in the consumer products industry. P&G will also be able to improve Gillette's free cash flow performance by their large amount of free cash flows and I believe that there will be many willing investors who would find P&G's stock very attractive during the acquisition process.