Der Mega Merger

Procter und Gamble übernimmt Gilette....

Cincinnati-based P&G (PG: news, chart, profile) will pay 0.975 P&G shares for each share of Boston-based Gillette (G: news, chart, profile) , valuing the stock at $53.94 -- a premium of about 18 percent.

Gillette shares surged $4.52, or 9.9 percent, to $50.20 in early trading, while P&G fell $2.82, or 5.1 percent to $51.50.

"This merger is going to create the greatest consumer products company in the world," said Warren Buffett, chairman and chief executive of Berkshire Hathaway Inc., Gillette's largest shareholder, in a press release. "It's a dream deal. To quantify that, I intend to purchase enough shares so that by the time the deal is closed, we will have 100 million shares of P&G."

Berkshire Hathaway (BRKA: news, chart, profile) (BRKB: news, chart, profile) currently holds 96 million shares of Gillette stock which represents the equivalent of 93.6 million shares of P&G, roughly a 3.7 percent stake.

A.G. Lafley, chairman, president and chief executive of P&G, told analysts at a Friday morning meeting in New York that Gillette's excellence in innovation was a chief attraction of the deal.

"Innovation is the lifeblood of this industry," said Lafley. "In Gillette's businesses and our businesses one of the reasons two-thirds of the brands are leaders in their industries is because they're innovation leaders."

Meanwhile, broker CIBC World Markets told clients in a note P&G was getting "one of the true 'crown jewels' in all of consumer products."

Gillette shares have risen from about $40 in the fall. P&G stock has risen 32 percent during the past two years, giving the company strong currency to engineer a major acquisition.

The deal merges Procter & Gamble, with 110,000 employees and nearly $52 billion in sales last year, with 101-year-old Gillette, which has about 35,000 workers and reported $9.25 billion in sales last year.

Gillette Chairman and Chief Executive James Kilts is expected to join P&G's board and become a vice chairman overseeing Gillette's business.

"This combination of two best-in-class consumer products companies, at a time when they are both operating from a position of strength, is a unique opportunity," A.G. Lafley, chairman, president and chief executive of P&G, said in a statement.

"Gillette and P&G have similar cultures and complementary core strengths in branding, innovation, scale and go-to-market capabilities, making it a terrific fit," Lafley said.

To reduce the dilutive effect of the deal, P&G said it plans to buy back between $18 billion and $22 billion of its stock over the next 12 months to 18 months.

Gillette and P&G plan to cut 4 percent of their combined work force of about 140,000, though the companies anticipate they still will have a major presence in Boston, Gillette's headquarters, according to the Wall Street Journal which first broke the story.

A spokesperson for Boston Mayor Thomas M. Menino said the city was reviewing reports of the deal but had no immediate comment.

P&G has long coveted Gillette, seeing its razor business as a natural extension for the array of consumer products marketed by P&G. A.G. Lafley's predecessor as chief executive, Durk Jager, made a secret, unsolicited attempt to buy Gillette five years ago but was rebuffed.

On the credit-rating front, Standard & Poor's Ratings Services Friday placed its ratings for P&G and Gillette under review, with the potential for both companies' ratings to be lowered one notch.

"We met with S&P and Moody's earlier this week and therefore that announcement was totally expected," Lafley told analysts. "Over the next couple of weeks we will be getting in touch with them in much greater detail."

News of the deal comes as many consumer goods companies are in a tremendous battle for market share and spending more and more money on marketing, advertising and research and development.

Gillette has a storied history of fighting off hostile takeover attempts, notably between 1986 and 1989, when it was the target of two of the period's notable raiders, Ronald Perelman and Coniston Partners. Gillette's first woman board member, Rita Ricardo-Campbell, detailed her account of the period in a 1997 book, "Resisting Hostile Takeovers: The Case of Gillette."

Procter & Gamble financial results

On Thursday, P&G posted a 12 percent rise in second-quarter earnings, to $2.04 billion, or 74 cents a share, from $1.82 billion, or 65 cents, in last year's period. The consensus outlook called for earnings of 72 cents a share.

For fiscal 2005, P&G said -- before news of the potential deal broke -- it now expects to earn $2.61 to $2.64 a share, an increase of 3 cents from its previous range and ahead of the consensus projection for earnings of $2.60 a share compiled by Thomson First Call.

Full-year sales are forecast to improve by a high-single-digit percentage, P&G said, with foreign exchange effects adding about 2 percent to that total.

The company posted sales of $51.41 billion in fiscal 2004.

For the third quarter, earnings are projected at 60 to 62 cents a share, straddling the consensus view of 61 cents.

P&G said the revision was based on strong sales and volume gains throughout its portfolio of brands and across its global sales regions. See full story.

P&G's strategy

P&G has facilities in more than 80 countries. Its brands include Pampers diapers, Tide laundry detergent, Pringles potato chips and Head & Shoulders shampoo.

At its annual analysts meeting in early December, P&G outlined its strategy to capture rapidly growing markets of developing countries.

Last fiscal year, developing markets represented about 21 percent of P&G's $51.41 billion in sales, versus as much as 45 percent for some of its key competitors, the company said.

According to P&G's research, consumers in developed markets buy more than three times as many consumer products as their counterparts in developing countries. More importantly, as the economies of developing countries grow, consumption of consumer goods has been catching up, according to Bob McDonald, head of global operations. See full story.

Gillette's position

Consumer-products giant Gillette built its global presence on razor blades and shaving products. Its empire now includes Duracell batteries, Braun electric shavers and hair care products, and Oral Care dental care products as well as skin care products and deodorants. The company has 32 manufacturing plants in 14 countries.

In late October, Gillette said it made $475 million, or 47 cents a share, in the third quarter, compared with last year's $416 million, or 41 cents a share.

Sales at Gillette reached a record $2.69 billion vs. last year's $2.4 billion as consumers demand for Gillette's new M3Power razor and other premium shaving systems were robust in the United Kingdom, Germany and Japan. See full story.

The company is scheduled to report fourth-quarter earnings Feb. 3. Analyst polled by Thomson First Call are looking for a profit of 42 cents a share vs. 35 cents a share a year earlier. Revenue is seen