THE GILLETTE COMPANY'S

ACQUISITION OF DURACELL
INTERNATIONAL INC. - COST OF
CAPITAL

Tedy Yuli Pusdiono 29110039

Anis Wardani 29110043
Dewi Natalia Sagala 29110075
Yogi Ivor Christian 29110066

Magister of Business Administration

School of Business and Management
Bandung Institute of Technology
2011

1 BACKGROUND
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?

The Result