Friday, January 28, 2005

Big Fishes, Little Fishes

In another example of consolidation being the only way forward for transnational corporations, Procter & Gamble have announced they are buying Gillette for $57 billion in a stock swap deal. This merger creates the world's largest consumer products company. (Details here)

The 168-year old Procter & Gamble, with 110,000 employees and made $52 billion in sales last year, merges with 101-year-old Gillette, which has about 35,000 workers and reported $9.25 billion in sales last year. Gillette's largest shareholder is the Oracle of Omaha, Warren Buffett. He plans to Pamper his babies, buying close to 100 million shares of the combined company.

This is the second time the two have tried to merge. Gillette, in the past, was vigorous in resisting mergers and acquisitions, having had many a close shave. This gamble will be proctored before it is through, but the ample number of competitors in this space indicate there should be no real issues with the merger.

Acquisitions provide fresh lines of business for companies, besides being an opportunity to create a better company. The impact on rivals is questionable - an agile rival can sidestep the merger-related restructuring, and take advantage of the complex efforts of the hitherto distinct companies to work as one. The mom-and-pop stores are further disadvantaged in the global marketplace, being effectively shut out of access to consumer dollars.

This deal will spark off the M&A frenzy for the year, and expect to see more consolidation, mergers and layoffs. P&G expects to cut about 6,000 jobs, or about 4 percent of the combined workforce of 140,000. Both companies are eminently profitable. Gillette's gross margin has averaged 60.3 percent in the past five years, while P&G's averaged 47.6 percent.Wal-Mart accounted for 17 percent of P&G sales last year and 13 percent for Gillette in 2003.

Multibillion U.S. mergers in 2004 have included JPMorgan Chase & Co.'s $58 billion acquisition of Bank One Corp., Cingular Wireless' purchase of AT&T Wireless Services Inc. for $46.7 billion and Sprint Corp.'s agreement to buy Nextel Communications Inc. for $35 billion, besides the Symantec-Veritas merger of $13.5 billion and Oracle-Peoplesoft for $10 billion

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