P&G's Acquisition of Gillette

It may appear that Gillette shareholders are getting a good deal; however, they could be getting a better deal. Gillette should receive closer to $60/share, and while an offer of $54.05 is a deal that is not as good as it could be, it is better than no deal at all. Using transaction multiples, we see that Gillette is being valued well above the market in valuations involving revenues, EBITDA and P/E multiples. Also, large benefits come to shareholders in the method of acquisition. Although it is an all-stock deal, shareholders are receiving a nearly 1-for-1 ratio of trade for the shares. However, P&G agreed to begin repurchasing stock over an 18 month period. Thus, shareholders are provided with a tax-free transaction or the opportunity to continue to be involved in the future of Gillette and P&G. That being said, one method of valuation using precedent transactions shows that P&G’s premium offer over Gillette’s share price is well below historical averages. With only a 20.1% premium compared to a ~50% premium from precedent transaction, it seems that Gillette shareholders should be looking for a higher premium. Also, a discounted cash flow of Gillette on a standalone basis values Gillette at $47.10 which is more than its current stock price, so when P&G offers a 20% premium on the $45 stock price, it really is only offering a ~15% premium on its projected value. Gillette shareholders are not receiving as much as they could, mostly due to the under valuing of the merger synergies.
Most of the synergies for this deal lie in the complementariness between P&G and Gillette. Both companies were key performers in the consumer products industry, but both had specific strengths within the industry. Beyond the complementariness of products were corporate strengths. P&G had strength in marketing to women, where as Gillette’s core segment was men. Thus, taking skills from both corporations would create strong synergies in attracting large