Investor's Business Daily
P&G-Gillette Deal Signals M&A Picking Up Where 2004 Ended
Friday January 28, 7:00 pm ET
Laura Mandaro
After a slow start to the year, corporate mergers got a fresh charge last week.
Procter & Gamble's $57 billion deal for battery- and razor-maker Gillette is the largest U.S. deal since J.P. Morgan Chase (NYSE:JPM - News) announced its $59 billion acquisition of Bank One last January. It's the 13th-largest U.S. announced M&A deal in history.
And investors are likely to hear at least one other piece of deal-related news this week. Buyout firms and cable rivals are expected to finalize bids on bankrupt rival operator Adelphia Communications over the weekend.
Meanwhile, sources say SBC (NYSE:SBC - News) is mulling a $15 billion buy of AT&T (NYSE:T - News).
All that activity and talk is restoking a merger fire that was crackling at year's end.
"In businesses where there are large economies of scale, there's just an enormous incentive to close strategic deals," said Carl Steidtmann, chief economist for consultancy Deloitte. "At the same time, the currency that companies use to consummate deals -- stock prices -- are relatively high."
Shares in Cincinnati-based P&G had risen 9% since an October low before the maker of well-known household products like Tide detergent and Pringles chips announced its deal for Gillette.
With more heft to squeeze better deals from advertisers and distributors, P&G expects to save $14 billion to $16 billion in revenue and cost synergies. It'll cut 6,000, or about 4% of the combined work force.
Now, other consumer products makers are expected to rethink their own expansion strategies. That's particularly true for those competing directly with P&G, such as Energizer (NYSE:ENR - News), whose batteries and Schick razors compete directly with Gillette's Duracell and Gillette razor brands.
"The consumer product M&A market has been a little quiet lately," said Ken Wasik, managing director at investment bank Houlihan Lokey Howard & Zukin. "This will definitely set off activity."
A rebound in stock prices since the end of the bear market in October 2002 isn't the only reason companies are linking up. They've been piling up cash since 2001.
"We're looking at some of the highest levels of cash relative to debt and capital spending since the 1960s," said John Lonski, chief economist for Moody's Investors Service.
Standard & Poor's estimates that the companies in the S&P 500 had about $767 billion in cash on their books by the end of 2003. Every indication suggests cash continued to pour in last year.
Meanwhile, financing big deals is cheap. The spread on high-yield bonds, a typical source of buyout financing, hasn't been so narrow since 1998, said Moody's.
Mergers Hot In Late 2004
These factors pushed a slew of big deals in the tech and medical sectors late in the fourth quarter.
Last month, Sprint Corp. (NYSE:FON - News) said it would buy wireless carrier Nextel Communications (NasdaqNM:NXTL - News) for $35 billion. Johnson & Johnson (NYSE:JNJ - News) agreed to buy medical-device maker Guidant (NYSE:GDT - News) for $25 billion. Security software maker Symantec (NasdaqNM:SYMC - News) said it would buy Veritas (NasdaqNM:VRTS - News) for $12 billion.
These, along with several big bank deals, propelled 2004 mergers volume up 46% to $834 billion.
That didn't include Oracle's long-running bid to buy rival business software maker PeopleSoft. A deal was reached in December, but counted toward 2003 M&A figures.
Cross-border deals have been rare. European and Canadian banks, telecoms and others were big players in the late 1990s merger mania.
But they've been largely absent lately, despite the 14% fall in the dollar vs. the euro from September to December.
There have been a few exceptions. On Friday, Molson shareholders voted for the Canadian brewer's $6 billion merger with Colorado-based Coors. (NYSE:RKY - News)
Also, China's state-controlled Lenovo agreed in December to buy IBM's (NYSE:IBM - News) money-losing PC unit. China National Offshore Oil Corp. reportedly is studying a bid for Unocal (NYSE:UCL - News).
Foreign firms may be waiting for the dollar, which has rallied recently, to hit bottom. They may fear earnings dilution from U.S. dollar-based profits. And they may not be ready to expand, said economists.
"Europeans are more grappling with growth, having tougher times getting out of the funk that U.S. companies have already gone through," said Houlihan's Wasik.
P&G will swap 0.975 of a share for each Gillette share. That's equal to $52.80 after Friday's close. Gillette rose 13% to 51.60, the highest in over five years. P&G fell 2% to 54.15.
Billionaire investor Warren Buffett loves the buyout, calling it a "dream deal." It's certainly a windfall for his investment company, Berkshire Hathaway (NYSE:BRKA - News), Gillette's largest shareholder.
Berkshire made $568 million Friday on its 96 million Gillette shares. Buffett says he plans to buy another 6.4 million P&G shares
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