With its $57 billion acquisition of Gillette Co., Procter & Gamble is just about there.
The merger would make P&G a nearly unstoppable global force in consumer-goods marketing. The combined company would have $62 billion in sales, easily passing Unilever as the world's largest consumer-products company and L'Oreal as the largest personal-care and beauty marketer. It would boast 50% or greater market share in several categories, including razors, men's deodorant and segments of oral care. It would have greater clout in negotiations with retailers-P&G is already Wal-Mart's largest supplier-media sellers and agencies. And it would return P&G to the top slot among U.S. advertisers, pushing it past General Motors Corp.
But while much of the deal's appeal to P&G executives comes from a relative lack of overlap in the companies, antitrust experts believe a combined P&G/Gillette could face considerable scrutiny and possibly divestiture demands in such areas as men's deodorant, whitening kits and power toothbrushes.
The move may also portend major advertising-agency shuffles, since Gillette's creative agency, Omnicom Group's BBDO, New York, is not on P&G's roster. It also gives WPP Group's MindShare, which handles more than $900 million in global buying for Gillette, a larger presence-at least temporarily-with P&G, which only recently landed on the roster after acquiring Grey Worldwide (see sidebar, below).
Berkshire Hathaway Chairman-CEO Warren Buffett, who will go from Gillette's largest shareholder to P&G's largest shareholder, referred to it as a "dream deal" and put his money where his mouth is. Mr. Buffett played a role in brokering the deal, said P&G Vice Chairman Robert McDonald in a Cincinnati news conference. And by pledging to increase his holdings in the newly combined company to 100 million shares, he'll own more than 3% of P&G.
Mr. McDonald acknowledged that P&G had been interested in Gillette. But he said serious negotiations began when Gillette approached P&G in December.
Gillette Chairman-CEO James Kilts, having sold both Nabisco Foods and Gillette at substantial gains within five years, will become a vice chairman of P&G and help lead the transition as part of the deal-the most clout an executive of an acquired company has ever had at P&G. According to one executive familiar with the deal, Mr. Kilts first approached P&G last fall, and was rebuffed until late 2004 or early this year.
Some big questions remain to be answered, including whether P&G will divest any brands, how Gillette will fit into P&G's business-unit structure, how many of an estimated 6,000 job cuts will come from each company and how agency assignments will be affected, Mr. McDonald said. P&G will target "management overlaps and support services" for head-count reduction, which he said would come both from P&G and Gillette.
"Fortunately, because of the way the regulatory process works, we have time to do that work," he said, adding that P&G expects an antitrust and regulatory review of six to nine months. "I'm not an antitrust attorney, but we think these businesses are complementary," said Mr. McDonald. "We tried to work with regulatory bodies to make sure we were doing all the right things to get a favorable outcome. Of course, we cannot predict what will happen."
Gillette's dominant razor and blade business, with global shares of more than 70%, and its Duracell battery business make up two-thirds of the company's total sales. There is almost no overlap with current P&G business, aside from P&G's license of the Old Spice and Noxzema brands to tiny American Safety Razor, which has razor shares in the low single digits.
Interestingly, the two companies were poised to square off in what could be the future of hair removal and skin care. As talks with Gillette began in earnest late last year, P&G purchased an option to buy a startup laser-hair-removal and skin-care company, according to a person familiar with the matter. A P&G spokeswoman declined to comment. Gillette at the same time extended its co-development pact with Palomar, another laser-hair-removal player.
There could be some antitrust problems lurking in the other third of the $10.3 billion Gillette business, which includes oral care and deodorant, said David Balto, a former Federal Trade Commission antitrust staffer and now an antitrust lawyer. Potential problem areas include men's deodorant, where the two companies would have a combined share of more than 50%, power toothbrushes, where they'd account for 60%, and at-home whitening products, where they command more than 80% share.
The policy of the Justice Department and FTC is to start by looking at the smallest possible market segment, Mr. Balto said. In whitening kits and power toothbrushes, the two companies faced a horse race with Colgate-Palmolive Co. only 12 to 18 months ago. But their success in largely pushing Colgate's Simply White paint-on whiteners and Actibrush battery brush out of the market could come back to haunt P&G and Gillette as they try to close the deal.
The decisive factor is how a combination would affect consumer prices, Mr. Balto said. That could play in P&G's favor in deodorants, where price and price promotion are less of a factor, he said, but could hurt in whitening and power brushes, where price competition has been fiercer. The big picture is the merger is going to go through," Mr. Balto said. "There may conceivably be some divestitures."
Retail and consumer-products consultant Burt Flickinger, who has served as an adviser in several antitrust cases, however, said he believes antitrust review will be "a layup" with relatively few sticking points.
Mr. Balto gives considerable credit to P&G's antitrust legal team, which pushed through the 2001 acquisition of Bristol-Myers Squibb Co.'s Clairol, which gave P&G shares of 35% to 45% in conditioner and shampoo. "The staff [of the FTC] I believe wanted to sue, but P&G lawyers were remarkably successful at convincing the higher-ups that there wasn't a case."
That P&G has steadily lost market share since the deal in those categories amid aggressive pushes by global rivals L'Oreal, Unilever and Kao could play into its favor for antitrust purposes this time, Mr. Balto said.
But that performance also points to a spotty track record for performance of major P&G acquisitions.
With the exception of the 1999 Iams acquisition, P&G's acquisitions in recent years, including Tambrands, Clairol and Wella, have all delivered disappointing top-line results, said Deutsche Bank Securities analyst William Schmitz during P&G's New York analyst meeting announcing the deal.
Asked why the Gillette deal would be different, P&G Chairman-CEO A.G. Lafley cited "world-class assets and world-class momentum right now."
Tampax's business is now showing rekindled growth thanks to the 2002 launch of Pearl, and parts of the Clairol and Wella businesses-including Herbal Essences hair care and fine fragrances-are showing strong growth globally, he said.
Mr. Lafley projected Gillette will give P&G the momentum to increase its long-term organic sales growth rate from the current 4%-6% to 5%-7%. That came despite Mr. Kilts' more conservative projection of 3%-5% long-term top-line growth for Gillette-a rate the company has easily been beating, posting an 11% growth rate through the first nine months of 2004, eight points of that excluding currency and acquisitions.
Gillette has faced far stiffer competition in its core razor business from Schick following its acquisition by battery rival Energizer Holdings in 2003. Schick's razor share in the U.S., Canada, Japan and Western Europe combined rose 2.5 points to 21.5% in the year ended November 2004, Energizer said last week.
But Mr. McDonald dismissed any notion that P&G was buying Gillette at the peak of its global razor dominance. "We believe there's a lot of potential in putting these companies together," he said.
Global synergies will play a big role in accelerating growth, Mr. McDonald said. P&G has four times the business Gillette does in developing and emerging markets. But Gillette gives P&G an entree into Brazil, a market where it has little presence.
Gillette is far stronger than P&G in Europe, but P&G could help boost a lackluster effort for Gillette in Japan, Mr. Flickinger said.
Combined, the two companies would have more clout, adding to P&G's ranking as Wal-Mart Stores biggest supplier. "As overdeveloped as P&G is with Wal-Mart, Gillette is underdeveloped," Mr. Flickinger said, noting that he believes P&G's traditionally strong relationship with Wal-Mart could help improve Gillette's presence in such categories as batteries, where rivals Energizer and Rayovac have a clear upper hand.
Conversely, the deal dilutes P&G's dependence on Wal-Mart somewhat. P&G got 17% of its sales from Wal-Mart in the year ended June 30, compared to only 13% for Gillette in calendar 2003. Combined, the two become Wal-Mart's first $10 billion supplier.
"Obviously it's extra clout," said Paul Kelly, partner in Silvermine Consulting. "How much they need, I don't know. ... The trade may have pushed back on Gillette on certain things they might not push on now."
The deal may create pressure on competitors to pair up in compensation, Mr. Kelly said, but it's unclear that there are deals that make sense. Colgate, which itself had been a suitor of Gillette in years past, according to industry executives, "looks awfully lonely out there by itself," he said, though potential acquirers as Unilever or Henkel could be constrained by debt or size in making a combination.
contributing: bradley johnson