The essay is answering questions based on the case study: “The Best Deal Gillette Could Get? Proctor & Gamble’s Acquisition of Gillette” in the Investment Banks, Hedge Funds, and Private Equity, 2nd Edition by David Stowell. Other news paper, articles or trust webs are fine to us. But the case study is the most important one.
Question 1 [2 marks]
What were the possible synergies and other driving forces propelling the merger between P&G and Gillette?
Question 2 [3 marks]
Evaluate the Proctor & Gamble offer. Identify and explain the positive and negative aspects of using (receiving) shares or cash for the acquisition from both the perspective of P&G and Gillette shareholders.
Question 3 [4 marks]
A) Describe the role played by Merrill Lynch (representing P&G) and UBS and Goldman Sachs (representing Gillette). (1 mark)
B) Given the transaction structure outlined under “Deal Structure: An ‘All-Stock’, 60/40, No-collar Acquisition” and Figure C4.3 outline the various products and business areas which may have been offered by the investment banks to support completion of the transaction (eg M&A adviser, debt arranger, underwriter, bookrunner etc). Describe briefly the tasks the investment banks may have undertaken for each of these roles, relating them specifically back to the case study. (2 marks)
C) Specifically describe which areas within the investment banks could have been utilized before the transaction was public and which areas could only be utilized after the transaction was public. Why do these distinctions exist? (1 mark)
Question 4 [5 marks]
Figure C4.4 (Stowell, page 502) shows the valuation of the deal calculated using various methods. For example, the sum of the parts valuation (in the middle of the diagram), assuming one billion Gillette shares, generates a value of $47 to $58 per share after subtracting $2.25 of net debt per share. Figure C4.5 (Stowell, page 503) dissects this sum of the parts valuation by ‘product division’ (for example, B&R = blades and razors) using multiples analysis.
A) Describe three methods that could be used to determine the appropriate value for a public company that is a potential M&A target. Draw out the differences in the three variations of the discounted cash flow (DCF) analysis as shown in Figure C4.4. (3 marks)
B) In Figures C4.5, how were the maximum and minimum ‘$ per share’ values calculated for the product divisions? Demonstrate this for two of the product divisions (approximate figures will do!) (1 mark)
When cost savings and total synergies are taken into account, the DCF analysis suggests that Gillette shares should be valued at $61.90 per share. The offer accepted by Gillette implied a value of $54.05.
C) Was Gillette ‘wrong’ in accepting this lower valuation? Give some reasons to support your answer. (1 mark)
Question 5 [2 marks]
Discuss the conflicts of interest for the investment bank in a mergers and acquisitions transaction where the same firm (investment bank) that writes the fairness opinion in support of the deal stands to receive a large fee if the transaction is completed.
Question 6 [4 marks]
A) Utilising the P&G Annual Reports between 2004-2007; calculate P&G’s return on equity (ROE) and the leverage ratio for the financial years of 2005 and 2006. What does the change in these financial indicators suggest? (1 mark)
B) Assess P&G’s operating and financial performance prior to and following the merger, by reference to relevant financial ratios suggested above as well as other financial ratios and performance indicators you believe are relevant. (1.5 marks)
C) Given the performance of the enlarged P&G following completion of the merger, would you rate the acquisition of Gillette a success? Consider this with reference to the financial, operating and share price performance of P&G over the ensuing 2 years following the merger. (1.5 marks)