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Did P&G Undervalue The Gillette Acquisition?

December 9, 2005

Secretary of the Commonwealth of Massachusetts William F. Galvin made public a report from University of Virginia assistant professor Rajesh K. Aggarwal that criticizes the Gillette Co. and Procter & Gamble Co. for undervaluing their proposed merger by billions of dollars.
Aggarwal’s report, which was released in June, claims that errors in the companies’ merger value calculations “benefit Procter & Gamble shareholders at the expense of Gillette shareholders” and that the public statements made by Gillette and Procter & Gamble officers “seem to understate the value of the merger.”
In public statements and state court battles over the merger, Sec. Galvin has argued that Gillette could be worth up to $15 billion more than Procter & Gamble’s proposed $57 billion purchase price. According to Prof. Aggarwal, the Boston-based Gillette’s internal documents pegged the merger synergies as high as $22.1 billion to $28.1 billion, while the two companies’ public statements estimated revenue and cost synergies of $14 billion to $16 billion.
Using the companies’ data, Prof. Aggarwal estimated the merger synergies at $18.9 billion to $28.6 billion, which would transfer $9 billion of synergy value to Gillette shareholders and $10 billion to $19.5 billion to Procter & Gamble shareholders. In public documents, the companies stated that Procter & Gamble shareholders would reap $5.5 billion to $7.5 billion in merger synergies.
Prof. Aggarwal also pointed out that although the merger terms are detrimental to Gillette shareholders, Gillette CEO James Kilts is collecting a $32.4 million change in control payment from Gillette and an “unusual additional payment” of $11.3 million from Procter & Gamble.
Nevertheless, shareholders of both companies overwhelmingly approved P&G’s acquisition of Gillette. In announcements at separate special meetings, the companies said 96% of the shares that were voted favored the merger. Procter & Gamble Co. and Gillette Co. now face regulatory hurdles as they prepare to blend their giant consumer products operations.
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