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P&G
Established in 1837
Category House, Personal Beauty, Baby, Health & Wellness and Pet
About 300 brands (50 leadership brands which generate 90% sales)
GILLETTE
1984 ORAL B, the company of toothbrushes and mouth care 1998: Created a new shaving system Gillette MACH3
In 1967 BROWN GmbH, manufacturer of drying electric shavers and electrical small devices
In the year 1996 Gillette takes over DURACELL, the company of big batteries
MERGER
Share for share exchange valued at 55.6 billion USD P&G offering 0.975 its share for each share of Gillette
Premium 18%
Combined Companies retained P&Gs name On hand announcement of stock buyback of 18-22 billion USD funded by debt Very similar organizational structures Complementary brands, markets and technologies
House
Personal Beauty
Personal Beauty
Baby
Batteries
Pet
Discussion Questions!!
Benefits It allows a company to control the entire manufacturing process, from raw goods to the end consumer.
This usually translates to better cost and quality control, since the company can set its own prices for raw goods and manufacturing
Horizontal Merger: If a company horizontally integrates, it acquires or merges with other companies that do the same thing (competing company) Benefits Horizontal integration allows a company to expand into new territories without the high expense of building from scratch Horizontally integrated businesses may benefit from economies of scale Once a company reaches a certain size, the cost of increased business operations grows at a much lower rate than the profit from those activities. Drawbacks For smaller companies, the drawback of this type of integration lies in consumer perception. Horizontal integration usually takes the form of a merger or acquisition, and these actions tend to be perceived as greedy or aggressive
As a result, the final company may suffer from a poor reputation and decreases in consumer goodwill.
Larger companies may find that antitrust or anti-monopoly laws slow or even halt horizontal integration processes, nullifying any cost-saving effect.
Economies of scale Marketing economies of scale: Removing redundancy in licenses paid for similar products (P&G: Disney, Gillette: Spiderman) Technical economies: Lay-off of 6000 staff from Gillette P&Gs global business services to support Gillette Global no. 1 player: enhanced bargaining power Supply chain retailers Economies of scope Introduction of razors for women Entry of Gillette into other consumer care lines Cost synergies Making available best-in-class costs to Gillette US$1.2bn identified as cost reduction Improving operating profit to 25% Revenue growth Gillette acquisition to raise 2005-2010 revenue CAGR by 1% Geographical diversification Entry of P&G into fast growing economies such as India and Brazil Providing entry to Gillette to China through P&G network Demographic diversification Women generally been P&G focus Gillette provides a strong brand for furthering reach to male segment Reverse synergy Understanding branding and production practices of a strong marketing rival Balanced portfolio Between i. Baby, family and household; and ii. Health and beauty 12 US$1bn brands in first segment, 10 in second
Q4: IMMEDIATELY FOLLOWING THE ANNOUNCEMENT, P&GS SHARE PRICE DROPPED BY 2% AND GILLETTES SHARE PRICE ROSE BY 13%. EXPLAIN THE REASON.
Q3: WHY DID P&G BUYBACK SHARES THROUGH DEBT? WHAT ARE LONG TERM IMPLICATIONS?
By buying back the shares, P&G is trying to increase the value of the investor Buy-back of shares increase the share-price as it creates demand for shares The liability of the company decreases as it wont be needing to pay dividend on those shares anymore Debt increases tax-savings Free cash available can be used in growth opportunities Incremental increase in borrowings can hurt P&G in the long run as it can hurt its debt rating