Extra
P&G-Gillette deal could spur more mergers
The next week will be key in gauging if the $57 billion deal will benefit shareholders in the long run. Plus, 21 stocks that could see a pop as speculation over additional mergers begins.
By Jon D. Markman
For a couple of soap and razor blade companies, the $57 billion Procter & Gamble-Gillette deal has a real meat-and-potatoes feel to it.
In contrast to so many deals struck in the synergy-silly 80s and 90s -- when soda maker Coca-Cola (KO, news, msgs) purchased film maker Columbia Pictures and oil driller Occidental Petroleum (OXY, news, msgs) bought beef producer IBP -- this is an easy-to-understand deal within a single industry. The same Procter & Gamble (PG, news, msgs) sales staff thats hawking Old Spice to Safeway (SWY, news, msgs) can throw one of Gillettes (G, news, msgs) Right Guard catalogs into their briefcase with little need for costly training or introductions -- assuming the antitrust folks let the company keep both businesses. Lay off a few thousand suddenly unnecessary Gillette sales people, and the deal can start making money for P&G shareholders pretty fast.
But that doesnt mean the deal will be a cakewalk for P&G shareholders, as the road of acquisitions is littered with car wrecks. A 2002 study by "Business Week" magazine, for instance, showed 17 of 21 major acquisitions done in 1998 worked out poorly for investors. The study included the famous deal in which insurer Conseco (CNO, news, msgs) saw 47% of its value evaporate and then collapse into bankruptcy after it purchased mobile-home lender Green Tree for an 86% premium.
And DaimlerChrysler (DCX, news, msgs) shareholders have still not recovered from the seemingly easy merger of the German auto giant with the U.S. auto icon, as the combined company has lost 32% of its market value since April 1998 -- badly lagging the 4% gain of the S&P 500 Index ($INX) and even lagging the paltry performance of U.S. rival General Motors (GM, news, msgs), down 18% over that span.
Common misstep: paying too much
The Business Week study, designed by Boston Consulting Group, looked at 302 major mergers from July 1995 to August 2001. It found that acquirers tended to suffer from a winners curse -- failing to win the cost savings imagined, retain key employees and integrate disparate information-technology systems and supply chains. The study found that 61% of buyers eviscerated their shareholders stake, as the average return of all buyers was 4.3% below their peers and 9.2% below the S&P 500. The study determined that buyers lost because they tended to pay too much. And, something P&G shareholders should consider, the ones that fared worst were the ones that paid with stock instead of cash.
Moreover, the study found that investors initial reactions were the best indication of subsequent results. When the bidders stocks traded off in the first week after the deal announcement, about two thirds were still in the dog house a year later -- by an average of 25%. Meanwhile, the stocks that were applauded by investors in the first week tended to continue to win, turning 5.6% one-week gains into 31% average gains a year later.
The speculation begins
If the deal does work out, it could serve two roles:
- It could be a catalyst for further mergers.
- It could set a floor for valuations in the sector.
Major acquisitions tend to happen in bunches, as egotistical chief executives in the industry -- egged on by commission-crazed investment bankers -- scramble to one-up each other. In the 90s, so many buyout announcements were crossing the news wires at the start of each week that the sobriquet Merger Mondays came into popular use.
At the same time, the deal suggests that the current price of Gillette is considered at least 15% undervalued by a supposedly smart buyer. When you consider that Gillette is going for a price-to-earnings multiple of 24 (and a price-to-sales multiple of 4.5) on estimated 2005 earnings growth of 13%, then that will be considered a minimum multiple for a top brand.
If the purchase does kick-start merger mania in the consumer non-durables sector, then its not too hard to figure out which companies are the most likely to come under a microscope by bankers and buyers in the next few weeks and months. Candidates would be ones with the most identifiable single brands that could be swept up neatly into an acquirers catalog. For the list below, I excluded companies like William Wrigley Jr. (WWY, news, msgs) that are primarily owned and run by single families.
Some of these may see a pop in trading over the next week as the speculation game begins.
| 21 acquisition candidates in consumer non-durables | | Name | Industry | Market cap | Price/
sales
ratio | Jan. 28 close | % chng.
last year | | Church & Dwight (CHD, news, msgs) | Cleaning products | $2.0 billion | 1.51 | 32.6 | 22.6 | | Clorox (CLX, news, msgs) | Cleaning products | $12.0 billion | 2.81 | 57.5 | 17.6 | | Hershey Foods (HSY, news, msgs) | Confectioners | $14.0 billion | 3.23 | 58.19 | 54.1 | | Tootsie Roll Industries (TR, news, msgs) | Confectioners | $1.6 billion | 4.12 | 32.02 | -8.4 | | Sara Lee (SLE, news, msgs) | Food | $18.0 billion | 0.92 | 23.23 | 9 | | ConAgra Foods (CAG, news, msgs) | Food | $15.0 billion | 1.02 | 29.53 | 13.8 | | H.J. Heinz (HNZ, news, msgs) | Food | $13.0 billion | 1.51 | 37.35 | 5.6 | | Campbell Soup (CPB, news, msgs) | Food | $12.0 billion | 1.63 | 28.92 | 9.8 | | General Mills (GIS, news, msgs) | Food | $19.0 billion | 1.71 | 52.68 | 16 | | Kellogg (K, news, msgs) | Food | $18.0 billion | 1.98 | 44.95 | 18.9 | | Newell Rubbermaid (NWL, news, msgs) | Housewares | $6.0 billion | 0.85 | 21.76 | -10.9 | | Energizer Holdings (ENR, news, msgs) | Industrial equipment | $3.8 billion | 1.33 | 52.87 | 27.4 | | Tupperware (TUP, news, msgs) | Packaging | $1.1 billion | 0.97 | 19.82 | 12.3 | | Rayovac (ROV, news, msgs) | Personal products | $1.3 billion | 0.92 | 36.76 | 53.2 | | Estee Lauder (EL, news, msgs) | Personal products | $10 billion | 1.72 | 45.37 | 10.7 | | Avon Products (AVP, news, msgs) | Personal products | $19 billion | 2.55 | 40.7 | 28.6 | | Colgate-Palmolive (CL, news, msgs) | Personal products | $27 billion | 2.7 | 52.69 | 2.8 | | Del Monte Foods (DLM, news, msgs) | Packaged goods | $2.3 billion | 0.74 | 11.27 | 4.7 | | Ralcorp Holdings (RAH, news, msgs) | Packaged goods | $1.2 billion | 0.81 | 42.92 | 29.6 | | J.M. Smucker (SJM, news, msgs) | Packaged goods | $2.6 billion | 1.6 | 46.08 | -1.1 | | McCormick (MKC, news, msgs) | Packaged goods | $4.5 billion | 2 | 36.96 | 24.5 |
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