The Procter & Gamble Acquisition of Gillette

TABLE OF CONTENTS

1. Introduction
1.1 Largest Transaction in Procter & Gamble’s History
1.2 Goal and Approach of This Study

2. Acquisition Analysis for the European Market
2.1 The Relevant EU Merger Legislation and Guidelines
2.2 The Parties of the Acquisition and Their Operations
2.3 The Relevant Markets
2.4 The Markets Prior to the Merger
2.5 Assessment of the Market Structures Post Merger
2.5.1 Concentration/ Market Shares of the Combined Company in the Relevant Markets
2.5.2 Entry
2.5.3 Potential Conglomerate Effects
2.6 The Decision of the European Commission

3. The Acquisition treated by the FTC for the U.S. Markets

4. Conclusion

APPENDIX

REFERENCES

1. Introduction

1.1 Largest Transaction in Procter & Gamble’s History

In January 2005, the Procter & Gamble Company (P&G) announced that it signed a deal to buy 100% of the shares of the Gillette Company. The transaction was valued at approximately $57 billion making it the largest acquisition in P&G history. “This combination (…), at a time when they are both operating from a position of strength, is a unique opportunity. Gillette and P&G have similar cultures and complementary core strength in branding, innovation, scale and go-to-market capabilities, making it a terrific fit,” said P&G chairman and chief executive A.G. Lafley.

Since the proposed acquisition was to be creating the world’s largest consumer-products company with more than 140,000 employees and annual sales of $60 billion, pushing European rival Unilever into second place, competition agencies like the European Commission (EC) and the Federal Trade Commission (FTC) notified the deal.^[1] The complaint was that the concentration creates or strengthens a dominant position, especially in overlapping markets of both firms and therefore anticompetitive effects like increasing prices would appear.

1.2 Goal and Approach of This Study

The goal of this study is to analyze the acquisition with respect to its impact on competition in the relevant markets.

Since the EC was the first competition agency that approved the acquisition and major P&G strategic goals are to gain growth and leadership in Western Europe, the study will be concentrated on the European Market. The treatment of this case by the FTC according to the U.S. market and its results will be briefly discussed and compared to the EC decision.

2. Acquisition Analysis for the European Market

2.1 The Relevant EU Merger Legislation and Guidelines

The EC applied the merger legislation ‘Council Regulation (EC) No 139/2004’, since the acquisition falls into its scope.^[2] The relevant sections are the following:

- Article 3 (1b): An acquisition by purchasing 100% of shares of a company falls under the definition of concentration.
- Article 6 (1b): the concentration notified (…) does not raise serious doubts as to its compatibility with the common market the EC shall decide not to oppose it (…).
- Article 6 (2): if the EC finds that, following modification by the undertaking concerned, a notified concentration no longer raises serious doubts (…), it shall declare the concentration compatible with the common market pursuant to paragraph 1(b).

To clarify its interpretation merger guidelines have been developed, especially how to assess horizontal concentration. According to paragraph 17, very large market shares – 50% or more – may in themselves be evidence of the existence of a dominant market position. According to paragraph 19, competition concerns are unlikely to be identified in a market with a post-merger Herfindahl-Hirschmannn Index (HHI) below 1000 and don’t require extensive analysis.

In addition, the competence of handling this case under the European Economic Area (EEA) agreement lay by the EC, because of the size of the deal and the involved territory.^[3] Article 57 of the EEA Agreement states that concentrations (…) which create or strengthen a dominant position as a result of which effective competition would be significantly impeded (…) shall be declared incompatible with this Agreement.

2.2 The Parties of the Acquisition and Their Operations

P&G, a global manufacturer of consumer goods, was founded in 1837 and has its headquarter in the U.S. It sells household and beauty care, health, baby and family product and has a large and strong portfolio of brands like Pampers, Ariel, Always, Pantene, Pringles or Olay. Products are provided to consumers in 140 countries. In 2005, with about 110,000 employees, the firm had net sales of $ 56.7 billion. The North America market accounted 48% of the total sales, Western Europe 24% and Northeast Asia and several developing geographies covered cumulated 28%. The company’s main goal is growth. A part of its growth strategy is to develop faster-growing businesses with global leadership potential and gain growth and leadership in Western Europe.

Gillette, a multinational manufacturer of consumer products founded in 1901, is active in oral care, small electric appliances, portable power batteries, blades and razors and personal care. Its portfolio consists of several well-known brands like Mach3, Duracell, Braun or Oral-B. Gillette’s headquarter is also located in the U.S. The firm employs about 28,700 people worldwide and had revenue of $ 10.48 billion in 2004. Gillette is seen as a main competitor by P&G, since it sells powerful brands in the same markets and even is number one in the oral care market over P&G that is only second as stated in their annual reports 2004.

2.3 The Relevant Markets

The horizontally affected product markets are Toothbrushes, Other oral care products, Antiperspirant/Deodorants (AP/DO), Shaving formulations, Fragrances and Small household appliances, since both companies are selling products in each market.

The product market Toothbrushes can be divided into the market for manual toothbrushes and powered brushes (battery and rechargeable toothbrushes). Prices for manual and battery toothbrushes vary significantly. Moreover, the production of powered brushes involves a different production technology than the production of manual brushes. A combined product market for battery and rechargeable toothbrushes seems to be reasonable, since there is no substantial price difference and both toothbrushes are sold together in the same product category. The production of rechargeable and battery toothbrushes is not fundamentally different.^[4]

Figure 1: Different Definitions of the Product Market for Toothbrushes

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The relevant geographic markets for the different types of toothbrushes are national in scope, mainly because European retailers negotiate on a national level with the national sales representatives of their respective suppliers. Moreover, there are substantially different market shares and significant price differentials between the member states of the EEA.^[5] Similarly, P&G’s and Gillette’s pricing policy is set at a national level.

Regarding to the other relevant markets the exact scope of the product markets (narrow or wide definition) and the geographic markets (national or EU-wide) were not defined by the EC.^[6]

[...]

^[1] The P&G acquisition of Gillette also was reviewed by the Canadian Competition Bureau and the Mexican Federal Competition Commission. All four agencies consulted and cooperated with each other under the terms of cooperation agreements.

^[2] The EU merger regulations have been revised and adopted in May 2004 to cope with a more integrated market and the EU enlargement.

^[3] The EEA consists of the 25 European member states plus Iceland, Lichtenstein and Norway. The EEA competition rules aim to prevent anti-competitive behavior within this area.

^[4] For the purpose of the assessment of the competitive situation the EC remained the question open whether battery and rechargeable toothbrushes belong to the same product market or if a joint product market for powered toothbrushes has to be defined. An argument for separate markets is brushing efficiency of rechargeable brushes seems to be superior to battery brushes. (Figure 1)

^[5] The EC investigations of the acquisition were restricted to the EEA.

^[6] An exact definition of the product and geographic markets regarding to the listed markets are not necessary, since the operations do not lead to competition concerns under any alternative market definition. Thus, this research paper will concentrate on the market of toothbrushes, since a combined operation raises competition concerns.