Case Study 1–1. Procter & Gamble Acquires Competitor
Procter & Gamble Company (P&G) announced, on January 28, 2005, an agreement to buy
Gillette Company (Gillette) in a share-for-share exchange valued at $55.6 billion. This
represented an 18 percent premium over Gillette’s preannouncement share price. P&G also
announced a stock buyback of $18 to $22 billion, funded largely by issuing new debt. The
combined companies would retain the P&G name and have annual 2005 revenue of more than
$60 billion. Half of the new firm’s product portfolio would consist of personal care, health-care,
and beauty products, with the remainder consisting of razors and blades and batteries. The deal
would be expected to dilute P&G’s 2006 earnings by about 15 cents per share. To gain
regulatory approval, the two firms would have to divest overlapping operations, such as
deodorants and oral care. P&G is often viewed as a premier marketing and product innovator.
Consequently, some of P&G’s R&D and marketing skills in developing and promoting women’s
personal care products could be used to enhance and promote Gillette’s women’s razors. Gillette
is best known for its ability to sell an inexpensive product (e.g., razors) and hook customers to a
lifetime of refills (e.g., razor blades). Although Gillette is the number 1 and number 2 supplier in
the lucrative toothbrush and men’s deodorant markets, respectively, it has been much less
successful in improving the profitability of its Duracell battery brand. Despite its number 1
market share position, it has been beset by intense price competition from Energizer and
Rayovac Corp., which generally sell for less than Duracell batteries. Suppliers such as P&G and
