Gillette
Exhibit 7 is a Sum-of-the-Parts valuation of Gillette, it fundamentally divide Gillette operation into parts and do individual valuations on all of them to take a fair value in the end. This valuation basically the replacement cost of each operation of Gillette. However, there are two problems with this valuation method. First, it does not take Gillette’s group cost-savings and synergies into consideration. Secondly, it does not take the cost-savings and synergies that Gillette can potentially offer to P&G too which could be a very strong bargaining chip for Gillette.
Exhibit 6 is a valuation using the public market reference points. It takes considerations of the standalone value of Gillette, the cost savings and synergies that can be achieved from the acquisition. This valuation method offers a fair and complete view of how much value does Gillette worth to P&G. Therefore offering a value gap between the actual worth of Gillette standing alone and the value of Gillette to P&G, in turn offering a fairer bargaining range for the two companies.
There’s an interesting difference between the standalone value of Gillette on Exhibit 6 and the value proposed on Exhibit 7. Both values should have been similar as both are the estimates of Gillette standalone value; at least the standalone figure on Exhibit 6 should be higher since it should have considered the internal cost-savings and synergies of Gillette.
Why is the public market reference lower than sum-of-the-parts?
There has been a study on this, though conglomerates were in vogue and synergy was mentioned in nearly every annual report. Sum-of parts often values worth more than whole company. Probably due to “closed-end fund effect” and the high cost of information.
Other speculations are,
(1) Cynicism versus naiveté: After the poor performance of corporate profits in recent years, investors may have grown cynical about the talents of high-priced managers.
(2) Inflation and hidden assets. Many of today’s
Exhibit 6 is a valuation using the public market reference points. It takes considerations of the standalone value of Gillette, the cost savings and synergies that can be achieved from the acquisition. This valuation method offers a fair and complete view of how much value does Gillette worth to P&G. Therefore offering a value gap between the actual worth of Gillette standing alone and the value of Gillette to P&G, in turn offering a fairer bargaining range for the two companies.
There’s an interesting difference between the standalone value of Gillette on Exhibit 6 and the value proposed on Exhibit 7. Both values should have been similar as both are the estimates of Gillette standalone value; at least the standalone figure on Exhibit 6 should be higher since it should have considered the internal cost-savings and synergies of Gillette.
Why is the public market reference lower than sum-of-the-parts?
There has been a study on this, though conglomerates were in vogue and synergy was mentioned in nearly every annual report. Sum-of parts often values worth more than whole company. Probably due to “closed-end fund effect” and the high cost of information.
Other speculations are,
(1) Cynicism versus naiveté: After the poor performance of corporate profits in recent years, investors may have grown cynical about the talents of high-priced managers.
(2) Inflation and hidden assets. Many of today’s