On January 28, 2005, the world witnessed the biggest merger in history between companies dealing in consumer good where Procter and Gamble (P&G) acquired Gillet at $57 billion to become the leading consumer good company in the world (Isidore, 2005). Many business analysts consider the merger between the two companies as one of the perfect marriage because P&G and Gillet are highly innovative companies that control a significant share of the market in consumer goods industry. According to the acquisition deal, P&G was to pay 0.975 for every share of Gillet, and it also undertook to buy back its shares to eliminate fear among Gillet shareholders about the dilution of their shares (Isidore, 2005). Analysts, therefore, agreed that the deal is likely to benefit both companies because of their many similarities by the time they were coming together. The paper, therefore, analyzes the motive and opportunities for the acquisition by first looking at the company overview of both P&G and Gillet.
P&G is an international firm company that was founded in 1837 by James Gamble and William Procter, who were both British citizens. However, the company was incorporated on May 5, 1905, and the company is headquartered in Cincinnati, Ohio in the US. The company is an international manufacturer of a wide variety of consumer products like beauty, health, fabric, home, baby and family care, and other feminine care products. Some of its customers include general merchandisers, groceries, club stores, drug stores and salons. The company serves about 4 billion people around the world, and it employs around 110,000 employees worldwide (Little, 2013). The company has based its operations in more than 70 countries, and its brands are found in about 180 countries across the globe. In 2014, the company had a net sale of $80.5 billion, operating cash flow of $14.0 billion, and net earnings of $4.0 billion.
Gillet Company is a multinational company that was founded in 1901 by King Camp Gillette (Little, 2013). The company has its headquarter in Boston, Massachusetts in the US and it now has 61 facilities in more than 25 countries with about 40,000 employees across the globe. It is one of the companies leading in the production of razors and other male and female grooming products. Some of the products associated with the company include electric and manual razors, shaving products, and skin care products like lotions, deodorants and creams. The company was acquired by P&G, and it is now operating as a subsidiary of P&G Company.
Industry Analysis (Porter Five Forces)
Bargaining of Buyers
The buying power in consumer goods industry is always weak because individual customers are fragmented leading to insignificant influence on prices of goods in the market (Senauer, 2001). However, the buying power can be enhanced if the main buyers from the companies are retailers. The retailers have the ability to bargain for the prices that can lead to stronger bargaining from the buyers in the industry.
Bargaining Power of Suppliers
There is relatively strong bargaining power from suppliers because the companies in the industry are likely to incur some cost when they are switching from one supplier to another. Small suppliers have a weaker bargaining power compared to larger suppliers who are in a position to influence the final prices of goods in the market (Solomon et al., 2012). However, it can be said that the bargaining powers of suppliers are limited.
Threats of New Entrants
The level of threat is low because of the high amount of investment capital that are required to start producing some of the consumer products like deodorants. However, there are some segments of the industry with a high threat of new entrants because some small companies can produce superior products like detergents to compete with the established companies like P&G and Gillet. Even though new entrants can effectively compete with established companies, they cannot easily access the market dominated by big companies. The threat of new entrants is, therefore, limited.
Threat of Substitutes
There is a high threat of substitute in the consumer goods industry because of the large variety of substitutes in the market. The brand loyalty is very low in because the products almost the same purpose and they have almost the same quality (Grunert, 2005). Therefore, they can easily switch from one product to another at will, making the threat of substitute to be high.
Competition in the industry
There is a high level of rivalry in the industry because of many players offering almost similar products (Karle & Peitz, 2014). The variety of substitutes and low loyalty among customers in the industry makes competitions even stiffer (Ford, 2014). Small firms can also enter the market to produce cheaper household consumable products like liquid soaps and other detergents, leading to stiff competition. The industry, therefore, is faced with the high level of rivalry.
Motives and Opportunities
The merger between P&G and Gillet is like to spur their growth due to the increased economies of scale. These are two strong companies with the ability to reduce the cost of production through economies of scale (Gaughan, 2013). The two companies also have the potential of increasing their growth together than separately because P&G will enable Gillet to access markets in China and Japan while Gillet is coming with products that grow fast in the industry.
The merger is likely to reduce the operating cost of the companies that may lead to higher profits. One way that they will be able to reduce the cost of operation is by reducing the cost of marketing products because they will have joint marketing. They will also reduce the number of employees to reduce the overlapping of roles, especially the management. The merger, therefore, will lead to expense optimization and increased penetration in the market (Little, 2013).
The merger between P&G and Gillet will lead to increased financial synergy due to increased financial strength and reduced cost of operation. The value with combine two companies plus the synergy will come to about $163,912 million, thereby, increasing the financial strengths of the two companies. The merger will also lead to the reduction of cost and efficiency of operation that will help in saving the cost (Damodaran, 2005). Therefore, there will be an improvement in the cost of capital.
The merger will benefit from increased diversification. First, there will be diversification in the products and brands that will enable them to control a wider market in the industry. There will also be a diversification in management as the two companies had different management styles and structures before coming together (Barker, 2005).
The two companies are known to be innovative and effective management, which may lead to increased management efficiency. Experts from different fields with different experiences will come together, leading to improved management. For instance, Gillet management is known to be cost efficient, the P&G management can adopt to improve the management (Neff, 2010).
The two companies will have the ability to combine knowledge and technologies, leading to increased innovation. They will have a complementary client knowledge and technology, which they will use to come up with joint efforts to improve innovations by improving the quality of products (Ahluwalia, 2008). Both P&G and Gillet are innovative, and they will have a competitive advantage by improving the quality of products through increased innovations.
It can be concluded that the historical acquisition of Gillet by P&G was a good deal for both companies because they all stand to benefit. Two companies are highly innovative and they are in a better position to come up with improved goods and services that can give them a competitive advantage in the market. The two can also enjoy economies of scale and reduced cost of operations leading to growth. They can also enjoy increased diversification in terms of products and expertise.
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