Our UK scribe writes:

Lots of excitement last weekend over this mega-deal and even the sage of Omaha thinks it's good. But is everyone not getting a bit carried away?

The combined giant will have sales in excess of $60bn (roughly $10bn from Gillette & the rest with P&G). Yet the companies are apparently talking of a present value of revenue and cost synergies of $14bn-$16bn. You'll have to help me out here guys, 'cos that is plain rubbish.

Over what time-frame do these heroic numbers apply? What exactly are the claimed savings? And what rate of return was assumed? The FT's Lex column smelt a rat and had a go at analysing these the other day but rather lost the plot.

Here's an alternate view:
Fact: Combined revenues c: $60bn;
Fact: Combined advertising spend c: $3bn;
Fact: Announced headcount savings c: 6,000;

Potential savings
Headcount: say $600mn (assume an average salary of $100,000 x 6,000). NB, not realisable on day 1;

Advertising synergies
Say 10% or $300mn. NB, not realisable on day 1;

Other head office / improved purchasing
Yr2 onwards as contracts are renegotiated and companies are better integrated. Say, $300mn - is it really certain that this merger will be a bigger cost-saver at the negotiating table with Wal-Mart, Aldi, Carrefour et al?

Total
: $1,200bn or 2.00%

Cash savings
Yr 1 Erm, none (all those payoffs, see)

Revenue synergies
Difficult to identify but would include some unquantifiable benefit from increased selling power. Worth, say, 1% (and I'm being generous here) or $600mn. Also, increased sales for Gillette in emerging markets of, say, $600mn pa (more generosity) over a few years.
Great deal guys - glad to see the investment bankers haven't lost their Midas touch.

Bookmark and Share

0 comments

Related Posts with Thumbnails