Key investor group endorses P&G's acquisition of Gillette
Galvin's concerns shrugged off by ISS
An influential investor advisory group recommended shareholders vote in favor of Procter & Gamble Co.'s proposed $57 billion acquisition of Gillette Co., brushing aside Massachusetts Secretary of State William F. Galvin's concerns about the deal.
Institutional Shareholder Services, which is hired by large stockholders to provide an independent evaluation of corporate mergers and other events, also said the ''arguably excessive" compensation being paid to Gillette chief executive James M. Kilts and other top officials is not enough of an issue for shareholders to oppose the deal either.
''Overall we it see as a positive deal for shareholders," said Chris Young, co-head of mergers and acquisition research for ISS. He said the rationale behind the deal to form a global consumer powerhouse with enormous cost-saving benefits ''makes a lot of sense, and the 18 percent premium P&G is willing to pay for Gillette ''appears to be reasonable."
The two companies said ISS confirmed what they had been saying all along about the deal. ''We're pleased with the ISS recommendation and their conclusion is consistent with our board's determination that the merger is fair and in the best interest of shareholders," said Gillette spokesman Eric Kraus. P&G spokeswoman Linda Ulrey added that the company is ''glad to see there's external recognition" of the value of the transaction.
Shareholders of both companies are scheduled to vote on the deal July 12. The companies have said the deal would result in about 6,000 job cuts out of a combined workforce of 140,000. The transaction will bring together some of the world's best known brands: P&G's Tide detergent, Crest toothpaste and Pampers diapers with Gillette's razors and blades.
ISS said Galvin's questions about the role Gillette's investment bankers played in the deal should not influence shareholders' votes. Concerned about the loss of jobs in Massachusetts, but limited by a state court in what he can investigate, Galvin is questioning whether Gillette's two investment banks, Goldman Sachs Group and UBS AG, withheld information from shareholders that would suggest Gillette could be worth much more than P&G is proposing to pay.
The regulator has complained the investment banks were influenced to produce a recommendation that justifies P&G's proposed price because they stand to receive $30 million each if the transaction goes through.
Galvin's office is scheduled to take testimony from Goldman chief executive Henry M. Paulson Jr., about the firm's fairness opinion. Paulson had personally called P&G chief A.G. Lafley last December after talks between the two companies first broke off, to urge him to reopen discussions with Gillette.
But Young said ISS and sophisticated stock investors discount or ignore altogether fairness opinions because they recognize the bankers issuing such rulings are in a potentially conflicted position because of the sums of money they can earn issuing a positive recommendation. Moreover, such opinions are typically directed at a company's directors, not shareholders anyway, Young said.
Galvin in an interview said if fairness opinions are important enough for company directors to rely on when making their decisions about a takeover, then they are ''not to be taken lightly" by shareholders, either. ''If the fairness opinions are tainted or inaccurate, it's not a fair indicator for shareholders as to what they ought to do," he said.
ISS does question portions of the compensation Kilts and other Gillette executives stand to receive. Kilts would receive a package valued at around $165 million. But ISS noted that much of that money represents the market value of stock and options that Gillette had awarded previously to Kilts, reflecting a ''sunk cost that would have been incurred regardless of the transaction."
However, ISS said another portion of Kilts's package is ''more troubling" -- that he is getting paid both to leave Gillette, and to stay with P&G for a year. From Gillette, Kilts is due to get paid three times his annual salary of $1.5 million and bonus and a supplemental pension payment worth $7.3 million; from P&G, Kilts would get his same salary and a similar bonus, as well as options to buy stock and share-grants worth around $23.3 million. Kilts will become vice chairman of the combined company and run a Boston-based unit which will include razors and blades. He has agreed to stay at least one year.
''To get a severance payment and then to get a brand new contract that is very generous did raise some questions," said Young.
Andrew Caffrey can be reached at caffrey@globe.com. 