Monday, May 09, 2005

Was the 13th largest business deal in name of good looks?

Procter&Gamble, a $52B company, recently announced plans to buy Gillette, a $9.25B company for $60B. A.G Lafley, chairman and CEO of P&G told analysts that Gillette’s innovation was the chief attraction of the deal. “Innovation is the lifeblood of this industry” said Lafley. “In Gillette’s businesses and our businesses one of the reasons two thirds of our brands are leaders in their industry is because they are innovation leaders”. According to the P&G leadership innovation is the official rationale for paying 25 times Gillette’s operating profits for the company.
Analysts have differing opinions: some claim that the deal was really motivated by retailer consolidation and some claim that P&G is simply buying growth because it can’t sustain enough growth through its existing brands. Acquiring Gillette would provide entry to a dozen new categories the consumer products giants is not currently in. Gillette’s brands are worth over $10 billion dollars while its supplier network is worth another $10B[LM1] . The supplier network alone adds immense value to P&G and helps the company in an industry marked with consolidations. One analyst notes” suppliers need to get big or get focused to maintain leverage with retailers”.
One final thought is that P&G is attempting to slightly divert its strategy from household cleaning to personal care. Reports have shown that only 49% consider housekeeping a priority and accordingly, household cleaning sales have decreased by 3% . Overall people are cleaning less and primping more. This presents an amazing opportunity for companies that are uniquely positioned to capture the Generation Xers or Baby Boomers that want to delay aging as much as possible. The GenXers and Baby Boomers alone spent $65B (8 times more than the teenage population) on personal care products in the United States and Europe to look and feel younger.

The aging population isn’t the only potential market that P&G would be able to capture with the acquisition since men’s grooming is also a growing category. Gillette is the current market leader in men’s care (razors, blades, toothbrush) and 89% find grooming critical to their professional success.

The main issues with the acquisition involve integrating two massive companies which is costly and time consuming. Reports have shown that 90% of co-brands do not survive due to incompatibility in culture, values and benefits(Business Source Premier). One recent and powerful example of acquisition going far worse than planned is General Mills and Pillsbury. General Mills acquired Pillsbury in order to diversify its products and have an international reach. As a result, General Mills laid off more workers due to weak sales that it had ever had to do in their history.

While P&G does gain economies of scale and higher negotiating power due to increased size, it does so in a business with decreasing margins. P&G’s strength lies in its ability to innovate and correctly target and segment consumers. The best strategy would be to focus on their core brands and innovate to grow the margins. As consumers become more price sensitive and less brand sensitivity it seems foolhardy to acquire more expensive, almost commoditized brands, instead of focusing on international growth and innovation.

Isaac Chen, Lisa Feria and Patricia Kwan

[LM1]Business Source Premier

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