Out on a limb and falling off
Does Bill Galvin really think Warren Buffett got hustled on one of his billion-dollar investment calls?
The secretary of state has stuck his nose into plenty of the investment world's darker corners over the years. By and large, the investing public has benefited from his probing and prodding.
Galvin's latest effort questions Procter & Gamble Co.'s planned $57 billion purchase of Boston's Gillette Co. This time, he's stuck his nose somewhere it doesn't belong.
Galvin says he isn't really challenging the price Gillette shareholders, including Buffett, would be paid in a stock swap. But that is the message that comes across loud and clear.
The secretary of state says he has an obligation to protect Massachusetts investors, and those who own Gillette shares have been given suspect information about the big deal. The numbers in question have to do with acquisition ''synergies," a financial boost that includes the cost-savings benefits of firing thousands of employees once the deal closes.
Galvin subpoenaed company documents and gave them to a University of Virginia finance professor he hired to conduct an analysis. Conclusion: The companies really expect synergies of $22 billion to $28 billion, much more than the range of $14 billion to $16 billion executives have discussed publicly.
That analysis packs a kind of one-two punch. First, it suggests the price offered for Gillette is too low, perhaps $15 billion too low, and shareholders are getting stiffed. It also makes you wonder how those additional synergies would be achieved and whether the layoff estimate was another low-ball number.
That's a compelling story, and it comes with a villain straight out of central casting. Gillette chairman and chief executive James Kilts, who stands to make perhaps $173 million in the sale of his company, would have all the motive in the world.
Unfortunately, there are a lot of problems with the story. Start with Gillette's biggest investor.
Buffett doesn't live in Massachusetts, but he has a long history with Gillette and might be the world's best-known investor. He bought a big position in Gillette more than 15 years ago and never sold a share. He joined the Gillette board and remained a director until 2003. He owns 10 percent of the company today.
When executives at Cincinnati-based P&G and Gillette disclosed their merger plans, they sought and received Buffett's public endorsement of the transaction. ''I have been happy with the [Gillette] investment, but I have to tell you I'm a lot happier today," Buffett said in a recorded message played during an investor conference call.
Here's what Buffett did next: He bought more Gillette stock, almost 5 million more shares.
Companies are valued many different ways when mergers are negotiated. All of them involve a blend of hard numbers, estimates, and flat-out guesses. Gillette, which doesn't grow very fast, is still valued at a lofty 23 times earnings that had been forecast for 2006. How institutional investors feel about the transaction has a lot to do with how they see consumer products and retailing evolving over the next several years.
The real Gillette question is about whether the company should have been sold at all. The price, though no windfall, is an issue at the margin.
''Shareholders ultimately have the right to do whatever they wish, but they have to be given accurate information," says Galvin, who has been in touch with the Securities and Exchange Commission about his analysis.
That's true enough, but I'm not convinced anyone has been deceived.
Bill Galvin has been a good regulator because he's aggressive and willing to take an occasional chance. This time, he went out on a limb and fell off.
Steven Syre is a Globe columnist. He can be reached at syre@globe.com.
