September 15, 1996, Donald Green, a new analyst at Cromwell Financial, puzzled over the financial markets & industry data in order to estimate the cost of capital for Duracell International Inc. (Duracell). The Gillette Company (Gillette) announced acquisition of Duracell. Duracell was valued at approximately $7 billion or 0.904 of Gillette share for each Duracell share owned.Shares in Duracell rose $9-$58.125. Shares in Gillette rose $0.875-$66 one of Cromwell's larger clients, requested an evaluation of the fairness of Gillette's offer. 3 generic approaches to valuing a firm:
• estimating the weighted average cost of capital (WACC) of Gillette
• techniques & inputs for the estimating the WAA
• base of calculations on Gillette's, Duracell's or some other target?
September 15, 1996, Donald Green, a new analyst at Cromwell Financial, puzzled over the financial markets & industry data in order to estimate the cost of capital for Duracell International Inc. (Duracell). The Gillette Company (Gillette) announced acquisition of Duracell. Duracell was valued at approximately $7 billion or 0.904 of Gillette share for each Duracell share owned.Shares in Duracell rose $9-$58.125. Shares in Gillette rose $0.875-$66 one of Cromwell's larger clients, requested an evaluation of the fairness of Gillette's offer. 3 generic approaches to valuing a firm:
• estimating the weighted average cost of capital (WACC) of Gillette
• techniques & inputs for the estimating the WAA
• base of calculations on Gillette's, Duracell's or some other target?
September 15, 1996, Donald Green, a new analyst at Cromwell Financial, puzzled over the financial markets & industry data in order to estimate the cost of capital for Duracell International Inc. (Duracell). The Gillette Company (Gillette) announced acquisition of Duracell. Duracell was valued at approximately $7 billion or 0.904 of Gillette share for each Duracell share owned.Shares in Duracell rose $9-$58.125. Shares in Gillette rose $0.875-$66 one of Cromwell's larger clients, requested an evaluation of the fairness of Gillette's offer. 3 generic approaches to valuing a firm:
• estimating the weighted average cost of capital (WACC) of Gillette
• techniques & inputs for the estimating the WAA
• base of calculations on Gillette's, Duracell's or some other target?
September 15, 1996, Donald Green, a new analyst at Cromwell
Financial, puzzled over the financial markets & industry data in order to estimate the cost of capital for Duracell International Inc. (Duracell). The Gillette Company (Gillette) announced acquisition of Duracell. Duracell was valued at approximately $7 billion or 0.904 of Gillette share for each Duracell share owned.Shares in Duracell rose $9-$58.125. Shares in Gillette rose $0.875-$66 one of Cromwell's larger clients, requested an evaluation of the fairness of Gillette's offer. 3 generic approaches to valuing a firm:
estimating the weighted average cost of capital (WACC) of
Gillette
techniques & inputs for the estimating the WAA
base of calculations on Gillette's, Duracell's or some other
target?
2 THE GILLETTE COMPANY
Gillette was a leading manufacturer of inexpensive grooming aids & household product 1995, the revenue $6.8 million razors is 1/3 of the firm's sales 70% of its revenue came from international operations. the company's major brands:
sensor razor
right guard
soft & dry toiletries
liquid paper stationery product
parker pens
braun appliances
oral-B
competitive pressure came mainly from 3 sources
shoppers
technological advances
retailer order patterns
In recent years, Gillette's sales growing by 9%/year. Net
income had grown twice that rate but only by improving profit margins. September 1996, had reported 24 consecutive quarters of double-digit growth in operating earnings. In 1996, shares were up 26% points and 88% points in the past 2 years. The company's capital structure (book) as of December 31, 1995, included 22% long-term debt & 78% equity. Annual dividends increased from $0.16/share(1985) to $0.6/share(1995). Gillette's quarterly dividends in 1996 were $0.18/share (annualized $0.72), projected earnings per share for 1996 were $2.22, and published beta was 1.15. The average beta for the high quality consumer global growth franchise stocks was 1.05 (the betas are tightly grouped with a maximum of 1.15 and a minimum of 1). Average debt to equity ratio for the global growth franchise stocks was less than 10%. 3. Issues Covered Cost saving could be realized by eliminating duplicative functions. Gillette expected to realize in cost saving over two years until 1999. It believed by acquiring Duracell could achieve $25 million in savings by the role of its core competence in sophisticated and efficient worldclass manufacturing and worldwide supplier standards and movable parts. The acquisitions presented an opportunity for both companies to leverage each others international sales channels and hoping to grow its market share outside the US by the support from worldwide marketing organization.
On September 15th, 1996, Gillette announced its intended acquisition
of Duracell. It was valued at aproximatelly $7 billion / 0.904 Gillette shares for each Duracell share owned. On NYSE, Duracell shares rose $9 to $58.125, Gillette shares rose $0.875 to $66. Followed up the announcement, Duracell asked Cromwell Financial to evaluate the fairness of Gillettes offer. 4. Problem Identification There were three generic approaches to valuing a firm: 1) Market Capitalization, 2) Comparable Transaction and 3) Discounted Cash Flow (DCF). While the first two methods were fairly straightforward, the DCF approach presented a number of important issues: a) Should it estimating Gillettes WACC (Weighted Average Cost of Capital) or Duracells? What specific techniques and inputs for estimating it were the most appropriate under the circumstances?