No one’s big enough. That’s the lesson to take away from the shocking decision by Gillette to give up and surrender to Procter & Gamble for $57 billion. For the longest time, large consumer-product companies like Gillette or General Mills or Hershey’s have insisted that their independence is the key to their long-term success. They have shunned merger discussions simply because they believe they will make you more money by growing their own businesses than by surrendering to another, consolidating company in the packaged-goods industry.
Until now. Gillette, perhaps the most fiercely independent company in the sector, the one that went to incredible lengths to stop repeated bids in the previous millennium, initiated the talks to be acquired by P&G because the dominant company in razors and batteries didn’t think it had the scale to compete worldwide. Despite its fantastic market share and unassailable brand, Gillette recognized that it could not generate consistent long-term growth in a global economy where China and India now mean more to the future than the United States and Europe. And, without publicly admitting it for fear of retribution, the people at both Gillette and P&G like the idea of presenting a united front of 21 brands, each worth a billion in sales to its worldwide master, Wal-Mart, especially when the Bentonville colossus so often pits them against each other, and a host of other soft-goods companies, when negotiating prices.
Most deals get hailed as transformational by the lackey business press, but they’re usually just the opposite. They’re about one failed company giving up, deciding that the growth is gone and the prospects bleak. Not this one. Gillette’s a winner; a huge success ever since Jim Kilts reenergized the company when he took it over four years ago. It didn’t need to be bought anytime soon; it was headed for another year of record earnings.
Managements are faced with a simple question: If Gillette can’t go it alone, who the heck are we to think we can?
That’s why this merger actually will make a difference to other name-brand entities. There are a half-dozen companies in the same situation as Gillette, dominating their businesses and currently making good money, but lacking the scale to compete globally down the road. Their managements are now faced with a simple truth: If Gillette can’t go it alone, who the heck are we to think that we can?
We should soon see some remarkable deals involving companies that would have thought merging equals defeat and failure, but now present a quick profit opportunity from a takeover. I’ve put together a list of classic brands, none of which I would ever have thought would be considered takeover candidates until Gillette gave them the cover to be bought.
Kimberly-Clark, a proud $31 billion equity synonymous with tissues and toilet paper, always seemed too big to be acquired, and never had a desire to combine. It’s difficult for me to see, though, after P&G-Gillette, how it could say no to a Unilever if it were to come calling. At Gillette-like valuations, you’d get $74 per share from Unilever, a 14 percent premium over the current price. I don’t like to recommend stocks just on a takeover basis because, typically, if there’s no deal, you lose money. But Kimberly’s on the upswing regardless: In the quarter just reported, it showed terrific high-single-digit growth. Why Unilever? It’s been suffering from a severe aisle smackdown from P&G, and it needs both the heft and the management from Kimberly—which is top-of-the-line—to reclaim critical shelf space.