Mergers and acquisitions

Over the past several years a series of large mergers have reshaped the corporate landscape. Recent events suggest that this trend is showing no signs of slowing down. Within the first three months of 2005, plans for four major mergers were announced: Procter & Gamble’s $55 billion bid for Gillette, SBC Communications’ $14.7 billion acquisition of AT&T Corp., Federated Department Store’s $10.5 billion acquisition of May Department Store, and Verizon’s $7.5 billion revised bid for MCI Inc. Combining consumer products giants Procter & Gamble (P&G) and Gillette immediately produced several winners. When the deal was announced, Gillette’s shareholders saw the value of their stock rise by more than 17 percent. One particular winner was Gillette’s largest shareholder, Warren Buffett, who owned roughly 96 million shares. Other winners include Gillette’s senior executives, who saw the values of their stock and stock options increase, and the investment banks that helped put the deal together. (Estimates suggest that Goldman Sachs, Merrill Lynch, and UBS each received $30 million from the transaction.) What remains to be seen is whether the deal makes sense for P&G’s shareholders. While many have applauded the deal, others suggest that P&G will have to work hard to justify the price it paid for Gillette. Moreover, as we point out in this chapter, the track record for acquiring firms in large deals has not always been that good. In an article written for The Wall Street Journal, shortly after the P&G–Gillette announced deal, David Hardin and Sam Rovit discuss the potential pitfalls of large acquisitions, and they estimate that only 3 out of 10 large deals between 1995 and 2001 created meaningful benefits for the acquiring firm’s shareholders. Hardin and Rovit (who are Bain & Company partners and co-authors of a recent book entitled Mastering the Merger: Four Critical Decisions That Make or Break a Deal) argue that there are five major criteria that determine whether a merger is successful: