Merger of Wella - P - G1

Analysis Of The Strategic And Economic Rational Behind The Acquisition Of Wella AG By Procter & Gamble.
Prepared by Carlos U. Flores December 13th, 2004
TABLE OF CONTENTS COMPANY OVERVIEW 3
History of the companies.........................................................................................................................................................3 Wella AG..............................................................................................................................................................................3 Procter & Gamble.................................................................................................................................................................4 Company strength and weaknesses........................................................................................................................................5 Wella AG..............................................................................................................................................................................5 Procter & Gamble.................................................................................................................................................................5 Description of products...........................................................................................................................................................5 Wella ....................................................................................................................................................................................5 Procter & Gamble.................................................................................................................................................................6 Market Shares and Distribution channels.............................................................................................................................7 Discussion of Synergy..............................................................................................................................................................7
INDUSTRY ANALYSIS
Overview...................................................................................................................................................................................8 Sector Analysis.........................................................................................................................................................................8 Professional hair care............................................................................................................................................................8 Consumer hair care...............................................................................................................................................................9 Fragrances.............................................................................................................................................................................9 Role of Merger & Acquisition in corporate strategy............................................................................................................9
RECENT HISTORY LEADING TO THE MERGER STANDARD RATIO ANALYSIS
10 13
Growth rates ..........................................................................................................................................................................13 Risk analysis...........................................................................................................................................................................14 Profitability Analysis.............................................................................................................................................................16
ANALYSIS OF THE VALUE PAID AND THE MODES OF PAYMENT
19
Description of the deal and analysis of valuation...............................................................................................................19 Transaction structure ..........................................................................................................................................................19 Mode of Payment...................................................................................................................................................................22
POST MERGER PERFORMANCE APPENDIX
23 24
Summary and Conclusion.....................................................................................................................................................23
Financial Statements.............................................................................................................................................................24 Wella AG Forecast.................................................................................................................................................................31 Wella Valuations....................................................................................................................................................................36

Carlos U. Flores Mergers & Acquisitions December 13th, 2003
Wella AG Forecast based on 300M synergies estimated by P&G...................................................................................37 WELLA VALUATIONS BASED ON 300M SYNERGY ESTIMATES........................................................................42
BIBLIOGRAPHY
43
Company Overview
History of the companies
Wella AG
Founded in 1880, by Franz Strher Wella AG is a leading beauty care company. Mr. Strher started his business in 1880 at age 26, producing colored wigs and related products directed to trends of imperial Germany. Mr. Strher first commercial success came with the invention of the tullemoid, a base upon which wig hair could be easily attached. The invention transformed wig making and allowed the company to open its first factory in Rothenkirchen in 1904 and four years later, FranzStrher OHG, was listed as a publicly traded company. Franz-Strher OHG acquired a license to produce perming appliances in 1924, the same year the Wella trademark was registered with the German patent office. By 1927 perms were all the rage among stylish women, and the company's machines were sold together with complementary hair cosmetics. By 1931, Wella Corporation, started operations within the US as other Wella businesses sprang up in Europe. Its hair care products, cosmetics, and appliances were top sellers, and the firm enjoyed a period of expansion until World War II reversed the company's fortunes since during this period Wella's overseas patents and subsidiaries were lost. In 1945, after the end of the war, Franz two sons George and Karl along with 12 former employees, gathered to begin a new company called Ondal and a year later Wella Fiseurbedarf was founded in Berlin. Demand for hair and beauty services gradually returned and the company supplied the growing international market. By 1950 headquarters were moved to Darmstadt, and the company became known as Wella AG. Products such as Koleston, a hair colorant, enjoyed global success. The company continued to expand throughout the 1960s, and by the end of the decade its products could be found almost anywhere in the world. By the 70s Wella was consolidated as a global corporation, during that time members of the founding family, now in its third generation, decided to reduce its role in the company and delegating day-to-day management responsibilities to a group of outside directors. Wella celebrated its 100th anniversary in 1980, the same year it purchased Tondeo-Werk, a producer of scissors and hairdressing supplies in Solingen, Germany. Wella went public in the German stock exchange in 1983. In the 90s, following German reunification, the company bought back operations it had lost. Wella also, initiated operations in the former Soviet Union and acquired 91% of Muehlens AG to boost its fragrance business. In 1995, Jorg von Crausharr became chairman of the company's management board. After a major drop in sales that year, the company posted consecutive gains through 1999. In 2000 Heiner Grtler succeeded von Crausharr as chairman. The following year the company acquired Graham Webb International, the fifth largest hair care products manufacturer in the US and in 2002 bought fragrance maker Escada Beaut Group S.A. as well as partnered with haircolorxpress
International. Wella also acquired 75% ownership of Tony & Tina cosmetic brands and the brands and business operations of Italian fragrance and cosmetic company, Atkinsons. In 2002 Wella combined its two US divisions, Intercosmetics and Adipar Ltd./Escada Beaut, naming it Cosmopolitan Cosmetics Inc. Later that year it formed a joint venture with Italian beauty-products firm Max Mara to develop, manufacture, and distribute fragrances and cosmetics under its Cosmopolitan Cosmetics name.
Procter & Gamble

Procter and Gamble (P&G) was founded in Cincinnati in 1837 with the merger of Candle maker William Procter and soap maker James Gamble, which incorporated in 1905. By 1859 P&G had become one of the largest companies in Cincinnati, with sales of $1 million. P&G introduced Ivory, a floating soap in 1879, this introduction was revolutionary because it was one of the first to advertise directly to the consumer. Other advertising innovations included sponsorship of daytime radio dramas in 1932. P&G's first TV commercial, for Ivory, aired in 1939. Members of the Procter and Gamble families headed the company until 1930, when William Deupree became president, position he held for the next 29 years. During Deupree leadership, P&G became the largest US seller of packaged goods. During the next three decades P&G introduced Tide detergent (1947), launched Crest toothpaste (1955) and Head & Shoulders shampoo and Pampers disposable diapers (1961). During the same period the firm also began a string of acquisitions starting Spic and Span (1945; sold 2001), Duncan Hines (1956; sold 1998), Charmin Paper Mills (1957), and Folgers Coffee (1963). In 1985 P&G moved into health care when it purchased Richardson-Vicks (NyQuil, Vicks) and G.D. Searle's nonprescription drug division (Metamucil). The acquisitions of Noxell (1989; Cover Girl, Noxzema), Max Factor (1991) and Clairol (2001) made it a top cosmetics company in the US. In 1997 it acquired Tambrands (Tampax tampons), making P&G #1 in feminine sanitary protection. Impatient with progress on its sales goals, in 1998 P&G began restructuring to focus on global business units rather than geographic regions. Chairman John Pepper handed over his chairman and CEO title in 1999 to president Durk Jager, who promised five new products a year and a shakeup of the corporate culture. In 1999 the company announced further reorganization plans, including 15,000 job cuts worldwide by 2005. That same year P&G bought The Iams Company (maker of Eukanubaand Iams-brand dog and cat foods). With earnings flat, Jager resigned in 2000. P&G insider Alan G. Lafley immediately assumed the president and CEO duties, and Pepper returned to succeed Jager as chairman. With Mr. Lafley in charge of the company, P&G announced in 2001, job cuts and cost reductions. It also sold its Comet cleaner business. In 2002 P&G closed three plants, one warehouse, and one distribution center -- eliminating about 750 jobs-- it sold its Jif peanut butter and Crisco shortening brands to J.M. Smucker and several personal care brands (including Sea Breeze and Vitalis) to Helen of Troy. In 2002 P&G branched out in a joint venture with Clorox to help it improve the Glad-brand plastic bags and wraps. P&G holds a 10% stake in the Glad venture.
In December 2002 Lafley announced that P&G had completed its multiyear restructuring and would stop reporting two sets of results (one with restructuring charges and one without).
Company strength and weaknesses

Wella AG
Wella AG is a leading beauty care company selling its products in more than 80 countries. The company's three divisions include professional hair care, retail hair care and cosmetics, and fragrances. The firms major strengths are its strong presence in Western Europe, Asian and Latin America markets and its expertise and recognition in the market segments it covers. The transformation into a mature company and overall projected slower growth forecast within the segments it participates constitutes Wellas major weaknesses and treats respectively.
Procter & Gamble

P&G, is the global leader in consumer products, the company emphasizes its growth on balance across brands and categories, across retail customers and channels, and across geographies. P&G is well-positioned in an industry that rewards branding and innovation. The company continues to strengthen its brands by using more creative, experiential, consumerdriven innovation and marketing approaches. The company has 16 brands generating $1 billion in sales a year and other 10 generating at least $1.5 billion. Most P&G brands are leaders in their respective categories; furthermore, the company emphasizes in innovation as the primary driver of sales and earnings growth in virtually all consumer product good categories. P&G combined historical innovative capabilities with its developing and branding strategies to create new internal and external linkages across technologies, disciplines, geographies and businesses constitute P&G main strengths. The firms considerable size and its ability to effectively and efficiently manage its portfolio of brands constitute P&Gs major weakness; the firm has been subject of constant restructuring since 1993. The degree to which they can materialize improvements in its operations will guarantee the growth of the firm.
Description of products
Wella
The company's produces, licenses, distributes and sells professional and retail hair care products, cosmetics, and fragrances in 5 continents. Wellas businesses are divided within the company in three divisions:
1. Professional hair care: the division produces 50% of the company revenue, it comprises color,
perm, styling and care as well as comprehensive services for salon owners and their employees. The full-service range is completed by the brands salon equipment and hair cutting equipment. Some of the brands under the professional hair care unit are: Wella, Koleston, Sebastian, Graham Webb, High Hair, Londa, Kadus, Welonda and Belvedere 2. Consumer retail hair care: accounting for the firms 30% on revenues, its main target is hair color segment. Under this product category we also find styling and care products. Some of
the brands under consumer retail hair care are: Wellaflex, ShockWaves, Ultra Sheen, Londa, Gentle Treatment, Nicky Clarke, Decor and Vivality; 3. Fragrances is the smallest unit in the group with 20%, organized by the holding company Cosmopolitan Cosmetics GmbH, is a leading product supplier on the international fragrance market comprised by: Gucci, Rochas, Escada, Montblanc, Dunhill, Anna Sui, Escada, Cindy Crawford, Mexx and 4711. Table 1
Sales a
Procter & Gamble
P&G is a true giant, the firm has over 160 brands world wide, and distributes its products in more than 150 countries world wide. The company divides its products offerings in the following segments:
1. Home products: this segment is divided between Fabric care and Home care products. Within
the Fabric care business P&G is the market leader with more than a 31% market share of the $40 billion category and continues to be a dominant player with brands like Tide, Downy and Ariel. Within the home care business the company distributes dish care, household cleaners and paper products, some of the most dominant companys brands within the sector are Swiffer, Febreze and Mr. Clean. Personal and Beauty: P&G manufactures and distribute products in various lines including antiperspirants and deodorants, colognes, cosmetics, feminine protection, hair care, hair color, personal cleansing, fragrances and skin care. The beauty care line includes 3 billiondollar brands, Pantene, Always and Oil Olay. Furthermore P&Gs Pantene brand is the worlds leading hair care brand which combined with Head & Shoulders, make the firm a retail hair care product powerhouse. Some additional relevant brands within this unit are: Clairol, Herbal Essences, Cover Girl, Max Factor, Noxzema and Old Spice. Health Care: P&G participates in the Pharmaceuticals with its Actonel brand. But the flag ship of this unit is the Crest brand which is number one in the U.S. in the tooth paste segment. Furthermore P&G has recently acquired success with the Prilosec brand which is gaining market share in the over the counter acid prevention market and Iams, which for third consecutive year is the number one pet nutrition brand in the U.S. market. Snacks and Beverages: the company two main brands in the in this segment are Pringles and Folgers, which holds leadership market share in the U.S. with 32%. Baby and Family Care: P&G owns the market leader diapers Pampers and Luvs, specially formulated detergent for baby clothes, Dreft and pre-moistened flushable wipe Charmin.
2.
Division
Professional Hair C Consumer

Table 2
3.
4. 5.
Fragance& Cosmet
(a)
Sums over 100% as
Source: Wella 2002 An
2002 Net Sales % of

Personal & beauty
Market Shares and Distribution channels
Professional salon hair care represents a market with sales of $10 billion globally. Wella estimates it has a 22 percent global share of the market, which places the company in the number two position in the world. P&G, through its Clairol brands, has a relatively small professional presence in North America and no presence in the rest of the world.
Home products Health care
Baby & family care
The global retail hair care market is a $34 billion industry. In this segment P&G has annual sales of more than $4.5 billion with leading brands such as Pantene, Head & Shoulders and Herbal Essences. Wella is complementary to P&G from both a geographic and category perspective, since P&G lacks a strong presence in western Europe and Asia, and has little presence within the hair care category.
Snacks & beverages
The size of the global fine fragrance market is approximately $20 billion. Wella's and P&G's combined sales in fragrances are more than $1.0 billion. Wella markets several brands that are, or have the potential to become, classics fragrances, marketed primarily to females, which complement P&G's male-oriented fragrances. Both firms have presence in global markets.
Total
Source: P&G annual Report

Table 3
P&G and Well

In perspective, Procter & Gamble acquisition of Wella enhanced consumer product giants presence in Western and Eastern Europe and Latin America. Furthermore it provides entry to the professional hair care products category, and strengths P&Gs position on the retail hair care and fragrance market.
Discussion of Synergy
The P&G and Wella merger is highly synergistic, with global geographic scale and the potential to generate significant efficiencies. Based on P&Gs estimates the acquisition is expected to contribute about 3.5 billion in sales to P&G's overall beauty business, based on approximately 1.6 billion in the professional hair care segment; 1.0 billion in the retail hair care segment; and 900 million in fragrances. Synergies to be gained from the combination of P&G and Wella are projected to be at least 300 million by the third year.
Product Line
Shampoo/Conditione
Wella is a leading beauty and hair care company with strong brands, knowledgeable management and an organization with deep expertise in the beauty business, the acquisition is a great strategic fit given P&G's leadership and proven strength in its core hair care business. Furthermore, the merger with Wella will help P&G drive innovation across the entire hair care portfolio and further expand the firms beauty businesses across Eastern and Western Europe, and in Latin America. P&G and Wella are in highly complementary businesses, Wella's strength in professional hair care complements P&G's strength in retail hair care. Wella's strength in color and styling complements P&G's strength in shampoo and conditioners. Wella's fragrance business is targeted mainly to females while P&G's is geared toward males, Wella's strength in Europe, Asia and Latin America complements P&G's strength in North America and the United Kingdom. By bringing these complementary businesses together, there are significant opportunities for top and bottom line growth in hair care. Furthermore cooperation in the purchasing area will deliver synergies for both companies by leveraging economies of scale in the purchase of raw/packaging materials, goods and services enabling both companies to be more competitive with the marketplace.
Industry analysis
Overview
Sales to the end-consumer both in consumer as well as cosmetics and fragrances businesses, has been subject to increasing consolidation on the demand side. Most competitors had been internationalized by mergers, joint ventures or licensing agreements. Therefore market participants are characterized by having a brand portfolio with an international focus. Maintaining and improving current position in the international hair care market and developing expertise in the area is the focus to maintain a strong presence in the business. Cosmetics and fragrance business are subject to increasing competition and shorter product lifecycles. In order to counter these obstacles, firms had been forced to increase the number of launches of new and appealing fragrance lines each year and ensure that they are widely distributed. Global professional hair care market continues to be highly specialized with relatively small number of participants. Furthermore, analyzing the German industrial landscape, Henkel made a bid to acquire Wella as a way to gain enough capacity to secure long-term growth in the sector, especially when P&G acquired Clairol in 2001. Given that P&G ultimately gain control of Wella, is expected that Henkel continues to seek an attractive acquisition to boost growth of their Schwarzkopf brand, which has about 6 per cent of the global wholesale hair care market.
Sector Analysis
Professional hair care
Professional hair care market is a specialized market segment catering to salons. The industry is dominated by a small number of participants including Alberto Culver, Wella, Beiersdorf, Este Lauder, John Paul Mitchell and L'Oral. The segment is particularly unique and is characterized by the close relationship between supply firms and customers through a deep network of industry professionals. Product development usually takes place based on the feedback and close
relationship with the customer, and market participants usually provide a wide array of equipment, services and products to the channel. With annual industry growth of 5% globally the professional hair care business, is dominated by LOreal which in 2002 had an estimated 29% market share of the professional hair care market, which represented a $10 billion market share growing at about 5%1. Latin America constitutes to the smallest professional market geographically but faces the highest growth rate in the world. North America continues to be the larger market for the segment and the Asia/Pacific region is experiencing e recorded growth of 2% in 2002. Growth in Europe, especially Eastern Europe, its increasing from figures obtained in 2001 and 2000.2 Hair coloring products account for 39% of the global professional hair care market and care products (shampoos, treatments and conditioners) represent a further 33%. Styling products (hair sprays, styling mousses, gels and waxes) and perm products follow with 19% and 9% respectively.
Consumer hair care

The global consumer hair care market is a highly fragmented environment dominated by multinational powerhouses. The industry is characterized by large investments in marketing campaigns and brand management. The leaders in the industry are Este Lauder, Johnson & Johnson, L'Oral, Revlon, Schwarzkopf & DEP, Unilever, Wella and P&G. Growth in the segment was 5% in 2002 and is projected to continue in single digits. Care with a share of 58% form the largest segment in the global consumer hair care market, followed by hair coloring products with 22% and styling products with 18%. The segment comprising others, especially perm products and hair tonics, accounts for 2% of the market. Demand for hair colors in the consumer segment is the highest growing sector, with permanent hair colors in particular contributing to this momentum. Growth for styling products is the slowest of the segments, with styling aids (such as gels and wax) recording the slowest growth.
Fragrances
The fragrances market is characterized by licensing agreements and joint ventures. The segment had a 2% growth in 2002, down from 3% growth in 2001. This segment was highly affected by the events of September 11th, 2001 as the travel retail decreased. Furthermore, given the extensive competition in the sector growth is expected to continue in single digits; consolidations within the industry are expected to overcome the saturation point the industry which was reached in the Western Europe and North America markets. Mens fragrances continue to be the highest growing product, while the share of womens fragrances remained virtually constant at around 62% and demand for unisex fragrances decreased. The brand fragrances segment is growing at a strong pace around the globe, with Eastern Europe recording the strongest increase in sales in brand fragrances. In the key countries of Western Europe and North America, manufacturers held on to their dominant market share.
Role of Merger & Acquisition in corporate strategy

A company characterized by opportunistic acquisitions, Procter & Gamble has a tradition to generate product leaders from within and through the purchase of market participants. The Wella acquisition is the largest deal P&G has ever done, but unlike its other sizeable beauty products deal, the Clairol
1 2
Goldman Sachs Global Equity Research Wella Annual Report 2002. Carlos U. Flores Mergers & Acquisitions December 13th, 2003
Inc. acquisition, this one puts the company in the position of serving a new customer Professional hair care business. P&G acquisition of Wella strengths Procter & Gamble core hair care businesses and permits focusing on higher-growth, higher-margin segments. Wella's professional hair care products business, led by the Wella, Sebastian, and Graham Webb brands, has averaged double-digit sales growth over the last three years - well above the annual industry growth of about 5%. Gaining a strong presence in the professional hair care market, which caters to salons, provides P&G access to industry thought leaders who can help the company better understand hair care needs and market trends. P&G has had a long history of success in the hair care business with products like Herbal Essences, Head & Shoulders, and Pantene, the top-selling shampoo in the world. With this acquisition, P%G becomes the No. 1 retail hair care company in the world and No. 2 in the professional hair care segment, behind French rival L'Oreal SA. The timing is right for this acquisition as P&G's overall business, and particularly its hair care business, are both strong with solid fundamentals in place. The acquisition of Wella represents a nice addition to P&G portfolio in the hair care business, even though no critical. The expected synergies between the companies, guarantee that Wella will not be a deterrent to P&G existing growth strategy, to the contrary it could be additive. Post Wella, hair care will represent 16% of P&Gs sales, an increase of around 11% over 2002 numbers. Furthermore, the role of the merger in the overall P&G strategic plan is directed to assess 3 main variables. First, augment P&G position in styling aids in Western Europe where Wella is number 2 and P&G does not have a presence. Second, it increases P&Gs exposure to color in Europe, Latin America and Asia where Wella has a strong presence but in case of P&G is non existent. Third, but not less important, provides P&G access to the Professional salon business, where Wella has a 22% market share globally.
Recent history leading to the merger

The following table shows the major events leading to the acquisition of Wella by P&G Date November 20, 2002 Description
The Financial Times reports that Wella dismissed recent reports that Henkel, its larger German peer, had submitted a formal takeover offer to Wella's main shareholding family. The reports came after Wella reported a 54 per cent rise in its 2002 third-quarter operating profits to 73 million, pushing the nine-month figure up 17% to 186 million ($188 million). The offer made by Henkle to Wella's main shareholder, a trust representing the family of Franz Stroher, Wella's founder, offered about 70 - 80 per share, valuing Wella at 5.3 billion. Even though Wella immediately denied it had received any offer, they also considered the price offered too low. On November 20, 2002, Wella's shares were up 3.7 per cent at 54.95. Henkel announces the purchase of a 6.9% stake in Wella. The purchase fulfills the interest of Henkel, of becoming one of the top five cosmetic companies (currently number 10). The purchase also allowed Henkel to receive an attractive gain by any rival bidder and force the Stroher family to run and action for the acquisition of Wella. Wella seem likely to be subject of a bidding war. An imminent bid from Procter & Gamble, the US consumer goods giant, was expected for 5 billion to 6 billion. The bid expected, valued Wella with a 30% premium over current market cap. P&G acquisition of Wella would allow them to catch up with the industry leader LOreal. Henkel shares were off 9.5% at 50.86 on concern that the company could overpay if
March 10, 2003
March 11, 2003
it were to directly enter into a bidding war with P&G. Wella's vote-holding ordinary shares were up 5% at 76.75.
March 18, 2003
March 19, 2003
The Procter & Gamble Company signed an agreement to purchase a controlling interest from the majority shareholders of Wella. The cash purchase of 3.2 billion gives P&G 77.6% of Wella's voting shares. P&G also announced a tender offer for the remaining voting and preference shares, valuing the total shares at 5.4 billion. Senior management of Wella voiced unhappiness over their takeover by the US consumer goods group, even after, Procter & Gamble promise to work closely with them. According to Heiner Gurtler3, Wella's chief executive, the transaction was not a necessary step for Wella to continue growing. "But the question of a sale was not in our hands and it is only fair that the descendants of the founding family decide to sell their stake." Moreover, Henkel1 announced that it would not make a counter offer on Wella and indicated that it had no interest to sell a 6.8 per cent stake in the company. P&G announced4 that it will pay $71.45 per Wella preferred share after disapproval of its original offer. P&G launched a formal offer for the outstanding shares and will raise the total price by about 800 million to 6.6 billion. The executive and supervisory boards of Wella AG, gave a limited to Procter & Gamble's contentious bid for Wella's outstanding shares. Therefore tendering their shares under P&G's offer of 92.25 ($106.04) per ordinary share and 65 per preferred share but refused to recommend that fellow shareholders to do the same. Close Brothers Corporate Financed Limited announced5 that is advising an informal Unofficial Committee of Wella Preference Shareholder that owns approximately 36% of the Wella Preference Shares, but excludes Henkel AG. The Unofficial Committee reiterates its strong belief that the terms of the Tender Offer being made by P&G for the Wella Preference Shares ("P&G Offer") do not offer adequate consideration to the Wella Preference Shareholders. The Unofficial Committee believed that P&G's offer of only 65 for the Wella Preference Shares is highly discriminatory to minority shareholders in Germany, when economically the Wella Preference Shares are virtually identical to the Wella Ordinary Shares. The Committee believes that this view is shared by many other Wella Preference Shareholders, independent research analysts and commentators. Furthermore, P&G's statement that it intends to pursue its plan for Wella regardless of whether substantial numbers of Wella Preference Shareholders remain as investors in Wella after the deal closes, runs the risk of disregarding the legitimate interests of minority shareholders in Wella. P&G announces the final results from the tender offer for Wella AG shares. The additional acceptance period, required by German law, expired at midnight on Friday, June 20, 2003. 9,053,768 voting and 10,167,531 preference shares of Wella AG (FSE: WAD) were tendered. This represents 20.51% and 43.49%, respectively, of each class of shares, or a total of 28.47% of the registered share capital. The tendered shares combined with the controlling interest that P&G secured through its share purchase agreement with the majority shareholders will bring P&G's total ownership of Wella AG to 79.17% of the total registered share capital and about 84.9% of the value of the outstanding shares. Now that the acceptance period is closed, only the appropriate regulatory approvals are needed for P&G to acquire the shares and to begin working with Wella management to devise and implement a joint business plan. Consequently, approximately 13.2 million Wella Preference Shares, with a capitalized value of some 840 million, will remain in the hands of outside investors.
April 29, 2003
May 9, 2003
May 29, 2003
June 26, 2003
3
5
The Financial Times Limited, March 19, 2003. London Edition; COMPANIES & FINANCE EUROPE ; Pg. 26 By Neil Buckley and Uta Harnischfeger PR Newswire Association, Inc. May 30, 2003, Statement on Tender Offer for Preference Shares in Wella AG by P&G Germany Management GmbH. Daily Deal, April 29, 2003. M&A. P&G raise its Wella bid. By: Andrew Bulkeley in Berlin
July 9, 2003
Close Brothers Corporate Finance Limited announces that it has written to Mr. A.G. Lafley, Chairman of the Board, President and Chief Executive of P&G, and to Dr. Heiner Guertler, Chairman of the Management Board of Wella, on behalf of a group of Wella Preference Shareholders that collectively owns about 30% of the Wella Preference Shares. In the letter the Minority Shareholders have requested public assurances of6: 1. Wella must continue to be managed as an independent, stand-alone company with strict observation of German corporate laws. In particular, the Wella Management Board must refrain from participating in any action, transaction, or activity that does not serve the best interests of Wella and all of its shareholders 2. The senior management of Wella must remain focused and incentivised to deliver value to the shareholders of Wella. 3. Wella separate management and financial accounting functions. Under German corporate law, any information made available to P&G as the majority shareholder must also be made available to minority shareholders. 4. The Wella Preference Shares will continue to be listed on the Frankfurt Stock Exchange 5. Wella continues to comply with all of its obligations as a listed company on the Frankfurt Stock Exchange. 6. Wella will maintain its current dividend policy, in terms that ensure a fair economic share of the value created by Wella is distributed to minority shareholders, and that P&G will support this policy. 7. The appointment of an independent director to the Wella Supervisory Board as one of the six shareholder representatives. The European Union gave regulatory clearance to continue the P&G acquisition of Wella. The EU clearance requires P&G to divest or license, for a period of five years, some hair care products -primarily Herbal Essences- in Ireland, Norway and Sweden where P&G and Wella have overlap. No other countries in Europe are affected by the regulatory ruling. Moreover, P&G obtained antitrust clearance in the United States. P&G still has to obtain regulatory rulings in a few markets including Mexico and parts of Eastern Europe. P&G announces the closing of the stock purchase agreement from the majority shareholders of Wella AG. P&G will purchase the additional tendered Wella shares on Sept. 10. With these combined transactions, P&G will own 98.1 percent of Wella voting shares and 79.2 percent of total company shares for a purchase price of 4.65 billion euros. Procter & Gamble also announced Heiner Gurtler, chairman of the management board of Wella AG and managing director of Cosmopolitan Cosmetics, has accepted an offer to serve as a president on Procter & Gamble's Global Leadership Council. In this role, Gurtler will lead the Clairol and Wella Professional Businesses and Cosmopolitan Cosmetics. He will remain chairman of the Wella management board. Professor Samuel Hayes, Jacob H. Schiff Professor of Investment Banking Emeritus at Harvard Business School, criticized of Procter & Gamble's two-tiered offer to Wella AG shareholders and P&G's subsequent conduct as Wella's majority shareholder. Minority shareholders of German hair care group Wella AG said they would sue majority owner Procter & Gamble Co. in German court after receiving short shrift at an extraordinary shareholders meeting in Frankfurt. The investors called the extraordinary meeting and hoped to force P&G into a
July 30, 2003
September 2, 2003
Sep 19, 2003
February 4, 2004
PR Newswire Association, Inc. July 9, 2003, Statement on Tender Offer for Preference Shares in Wella AG by P&G Germany Management GmbH.
"domination agreement." This would make the consumer goods giant buy their stakes at a price set by an independent auditor. The group said P&G is illegally treating Wella as a division, rather than as a separate company, and pointed to a licensing agreement unveiled last month that has P&G acting as global distributor of Wella's retail brands. The next step is expected to be moving Wella's retail activities to P&G's German headquarters and cutting overlapping staff. But at the start of the rowdy meeting, P&G said a domination agreement is unnecessary and rejected the appointment of an independent auditor, even though the Wella board had supported such a move. The company also said it wouldn't approve a no-confidence vote in Wella chief executive Heiner Gutler, who further angered the investors by taking an executive spot with P&G shortly after it bought Wella. Once it has 95% of the company's shares, P&G is allowed by German law to squeeze out all remaining investors and integrate Wella. Several executives have departed from the company, including retail head Axel Dietz and professional products chief Fritz Kuhn. The head of human resources, Alfred KrAmer, is also reportedly thinking of resigning.
April 26, 2004
Wella AG and P&G concluded a domination and profit transfer agreement. The conclusion of the agreement was approved by Wella AG's Supervisory Board. P&G will gain control of Wella AG as defined under Sections 291 et seq. of the German Stock Corporation Act (Aktiengesetz; "AktG). Under the agreement, P&G is entitled to give instructions to the Management Board of Wella AG. Additionally, profits of Wella AG will be transferred to P&G. As required by German law, P&G and Wella jointly filed an application to appoint an independent contract auditor with the German Regional Court in Darmstadt, Germany, on March 1. The court appointed Ernst & Young AG Wirtschaftsprufungsgesellschaft (E&Y). Procter & Gamble and Wella AG today signed a contract to establish P&G as the purchasing agent for Wella. P&G will create a purchasing organization comprised of resources from both companies to purchase raw materials, packaging materials and services for the two companies. As a result of the agreement, parts of the central purchasing activities of the Wella group will be transferred to P&G's global purchasing centers. Nearly all affected Wella employees will be offered positions within Wella or P&G. The contract is effective July 1, 2004.
May 7, 2004
Standard ratio analysis

Ratio analysis will allow me to analyze and compare the firms independently from its size; furthermore, it will yield an overall assessment between Wella and P&G in order to determine the sources of value creation based on efficiencies or characteristics that the acquiring company has historically shown.
Growth rates
From Table 4 I learn that for Wella sales, COGS and SGA are growing at similar compound rate, therefore Wella is expected to continue to maintain the same profit margins. Moreover, I see that interest expense compound growth had increased to a larger extent compared to other elements of the income statement; the higher growth of interest expense reflects Wellas use of debt to support its growth and I would assess once I study the leverage ratios for the firm. Table 4 Wella
Procter & Gamble reflect growth rates of a mature, cash flow generator firm. Table 5 shows that the compound sales growth for P&G is only 2% which is lower than Wella but expected given the firms size and diverse array of portfolio companies. The most significant measure in the income statement though is COGS, as P&G continues to increase its operating leverage. Given P&G size, is surprising that they continue to find ways to improve COGS and consequently gross profit margins; based in recent restructurings in the company which have taken place under the watch of Mr. Jager and Mr. Lafley, and the merger with Wella, P&G is expected to continue to improve its COGS. Table 5 Procter & Gamble
Income Statemen
Risk analysis
Enterprise risk is measured by liquidity (short term capacity to fund debt) and solvency (long-term ability to fund debt) ratios and indicate the capacity of the firm to support its debt.
From Table 6 and 7 I learned that Wella has higher current and quick ratios than P&G, further analysis of the calculated liquidity ratios indicate that there is a considerable difference of the cash cycle (Net Working Capital Days) for both firms. Table 7 indicates that P&G has had approximately 50 days of cash cycle financing in contrast of Wellas 110 days. The difference in cash cycle constitutes a tangible opportunity for value creation and I believe this is the main source of the 300 million synergy value on the merger forecasted by P&G. Table 6 Wella
Sales Cost of Goods Sold GROSS MARGIN Selling & Admin. Expe Income Stateme Income Tax Expense Sales OPERATING MARG Cost ofFACTORS: Goods Sold RISK Interest Expense GROSS MARGIN LIQUIDITY: NET INCOME
Given P&G market power, large array of resources and experience managing businesses; I believe that the simple adaptation of corporate procedures will allow Wella to generate enough synergies in the short-term to guarantee increases of cash flow. Analyzing the elements of the cash cycle I noticed that the differences between the firms are concentrated in days inventory and receivables held. Days inventory held would immediately improve by the re-assessment of inventory management which usually requires advance integrated information systems and market power, both of which P&G has in place. Furthermore, as previously stated in the analysis of synergies, P&G expects to leverage the integration of its businesses with Wellas to gain cost savings improving its COGS and ultimately days payable held. Days receivable held are usually driven by the firms relationship with the customer and improvement of collection practices. Given P&Gs market power, I expect that Wella will improve receivables by discounts and re-structuring of terms, therefore improving its collection period. Table 7 Procter & Gamble
Solvency ratios indicate that the capital structure of Wella and P&G are similar, with the former having slightly higher leverage. The main difference in the solvency of the firms and its capacity to affront debt long-term, which is given by companys ability to generate cash. As seen in Table 7, P&G is a money machine firm, it has double the percentage of operating cash flow to total liabilities that Wella does. Furthermore, P&Gs interest coverage ratio is in average 9.2 compared to 4.8 of Wellas. The difference in capacity to generate cash reduces a firms risk, therefore improving credit ratings and decreasing cost of debt. The lower risk structure provided by P&G is another source of synergy generated by the merger, but for the purpose of this paper, the assessment of such saving is assumed to happen in the long run, given that debt outstanding short term will be difficult to refinanced and improvement in credit ratings usually are materialized until additional long-term debt is required.
SOLVENCY: Total Liabilities / Tota LT Debt / (LT Debt + LT Debt / Share Equi Operating Cash Flow RISK Coverage Ra FACTOR Interest LIQUIDITY: Ratio Price Earnings SOLVENCY: Current RatioValue Market to Book
Total Liabilities / T Quick Ratio LT Debt / (LT Deb Days Receivables LT Debt / Share E
Price earnings ratio and market to book ratio, also assessed by the solvency ratios, illustrates the assessment of the market on each firm. I noticed in P&Gs case the market provides a considerable premium compared to Wella. This was expected given the higher profit margin, lower risk and strong cash flow provided by P&G. Furthermore, valuations based on the assumptions that Wella did not proceed to merge with P&G and made at the end of 2002 indicate that the market price is consistent with the firms value.
Profitability Analysis
Procter & Gamble has considerable higher profit margin than Wella, but in order to perform a detail assessment on both of ROA and ROCE, Figure 1 and 2 shows the composition of each ratio. As seen in Figure 1 and 2, P&G has higher profit margin for return of assets than Wella. The figure shows the composition of the profit margin by providing the value of each major element of the income statement as a percentage of sales. I notice that there is an inverse relationship between the cost of goods sold and selling and administrative expenses between the firms, which can be explained given difference in accounting practices between Germany and the US. By assessing the overall percentage of both measures, P&G presents a lower amount of COGS and SGA. This was expected given P&Gs higher operating leverage and savings the firm has in its sales efforts due to its market power with ad agencies and other service providers, furthermore given that P&Gs brands are leaders in their respective industries (High brand equity) the firm is expected to have to invest smaller amounts of capital in SGAs. Figure 1
PROFITABILITY ANALY
As previously indicated by the liquidity ratios P&Gs current assets turnovers are much higher than Wellas, but its overall asset turnover are of similar value. This is caused by the low fix asset turn over of P&Gs compared to Wellas, furthermore, as seen in the appendix (Financial statements), P&Gs has considerable higher percentage on investments and other current assets. This account usually reflects long-term investments and holdings in other companies, which increases the amount of assets of the firm and reduces its asset turnover. Figure 2
Level 1
PROFITABILITY ANALYS
Differences in return on common equity as shown in figure 3 and 4 are due to profit margin differences. Capital structure for both firms is similar with Wella reflecting slightly higher leverage. Figure 3
Level 1
ROCE PROFITABILITY AN
The higher return on common equity for P&G can further support the higher market to book value ratio and price earnings premiums, given that P&G provides and average 35% return on common equity, investors will be willing to pay premium to hold a piece of the equity of the firm.
Level 2
Figure 4
ROCE PROFITABILITY A
Table 8 Wella
PROFITABILITY
Level 3 RETURN
PR ON ASSE
Table 10 and 11 present operating performance measures that have been already assessed in previous ratios analysis. Table 10 Wella
x Asset Turnover Asset Turnover OPERATING PER x x Capital on / Sal Structure Gross MarginAssets = Return = Return Profit Be on Comm Operating OPERATING PER Net Income - Conti Gross Margin / Sal Operating Profit Be
Table 11 P&G
RETURN ON COMMO Profit Margin for ROC PROFITABILIT x Asset Turnover RETURN ON COM RETURN ON ASS x Capital Structure Le Profit Margin for R = Profit Margin for R Return on Common
Table 9 Procter & Gamble
Analysis of the value paid and the modes of payment

Description of the deal and analysis of valuation
Transaction structure
P&G is paying 5.4 billion plus the assumption of 1.1 billion in debt for a total enterprise value of 6.5 billion. As a first step in the merger, P&G has agreed to purchase the Stroeher family ownership of the company for 3.2 billion, which represent 77.6% of the voting shares. With the remaining part of the shares being purchased by a public tender. The common share have a tender price of 92.25 per share which represents a 58% premium over the average stock price over the last 6 months and a 59.7% premium over the 57.75 per share value at the annual report ending year price. The public tender price for the preference shares is 61.5 per share, representing a 15% premium. In order to understand the premium paid for common shares by P&G, I determined the value of Wella as it was at the end of 2002, the valuation was made on the basis that Wella will continue to run its businesses based on the same strategic plan historically shown by the last five years of financial information and the firm capital structure was sustained in the short run. The growth assumptions for each account of the firms financial statements necessary for the valuation are presented in the appendix (Wella AG Forecast). To determine the value of Wella as of December 2002, the weighted average cost of capital needs to be determined, to do so I first had to calculate the firms cost of equity capital and cost of debt capital. Cost of equity capital was determined using the CAPM, based on the assumption that Wellas beta was highly correlated to the German stock market. Given that the company is the second largest in its sector, has a 124 year history and is a flagship stock firm of the German stock exchange with presence in all major stock indexes the assumption is strongly supported. Risk free rates and market premiums are values for the German market (where Wella collects its equity capital). Market value for the firm is determined as of December 31st, 2002 based on a final stock price of 57.75. Cost of debt is determined by the weighted average of debt financing interest rates effective in 2002, the information was gather form Wellas annual report.
VALUATION ASS
Given the assumptions and using the DCF valuation method I have the following results:
COST OF EQUITY CA Equity risk (i.e. beta) Risk free rates

FSAP OUTPUT: FIRM NAME:
VAL Wel
To further confirm the valuation I used 4 other different methods to calculate the firms estimated value per share, the methods used are: expected equity cash flow, the residual income, the marketto-book residual income and the dividend based valuation. The results for the expected equity cash flow are presented as follows, with the rest presented in the appendix (Wella Valuations):
In order to support the price paid by Procter & Gamble, I again valued Wella based on the assumptions that the firm will continue to operate its business under normal market conditions and P&G would generate synergies valued in 300 million by the third year. P&G assumptions of 3.6 million of additional revenue are already assessed in Wellas current valuation estimates. Valuation assumptions would change with new synergies since they are expected to beneficially affect asset turnover, therefore increasing the market implied value of equity and altering the WACC of the firm.
FREE CASH FLOWS FOR AL AND EQUITY STAKEHOLDER Net Cash Flow from Operation FSAP OUTPUT: VAL Add back: Interest Expense af FIRM NAME: Operating Cash Wel +/- Change in Free Cash Flow from Operatio FREE CASH FLOWS FOR CO Net Cash Flow from Investing EQUITY SHAREHOLDERS Free Cash Flow - All Debt and
Free Cash Flow - All Debt and Present Value Factors
VALUATION ASS
As previously stated and supported by the ratio analysis, synergies generated by P&G will be the result of improvements in management of cash cycle and the consequently enhances of assets turnover. The complete forecast of the synergies can be found in the appendix (Wella AG forecast based on 300 M synergy estimates by P&G) and can be compared with the previous forecast made assuming that Wella continues business as usual. By comparing the two forecasts is clear that the 300M generated in cash by the firm is caused by improvements in percentage of COGS, decreases in inventory due to better practices and increase in cash due to improvements in collection. Again I used 5 methods to determine the value of the firm, three are included in the appendix and I show the Free cash flow valuations and the expected equity cash flow:
COST OF EQUITY CA Equity risk (i.e. beta) Risk free rates Market risk FSAP OUTPUT: premium VAL Required FIRM NAME: rate of return Wel
FREE CASH FLOWS FOR ALL AND EQUITY STAKEHOLDER Net Cash Flow from Operations
VAL Wel
From the results I obtained, I first notice that the value of Wella reflected by its stock price is consistent with the value of the firm using traditional valuation methods and assuming the firm continues business as usual. The difference on value from the results obtained and market price vary by less than 5%. Dividends based valuation gives a higher value to the firm at 60.37 per share compared to the 57.75 per share market value. When I make the valuation assuming a 300 million of additional cash flow generated by the firm due to synergies, I obtain that the Wella should had been valued with a 15% to 23% premium, which represent a much lower price that the 59.7% offered by P&G.
FREE CASH FLOWS FOR CO EQUITY SHAREHOLDERS
The value obtained for Wella given the 300 million in synergies is consistent with the offer made initially by Henkel and consequently rejected by Wellas owners. I suspect that P&G was motivated to provide a higher premium to appeal Wellas owners and allow them to take control of the firm quickly. A bid war with Henkel would have drain additional value from P&G and extended the required time to start generating returns from the firm. Furthermore, additional value creation opportunities could have been identified or different assumptions could also be made therefore supporting the additional premium paid. When the analysis of price paid is made using the EV/EBITDA multiple, I found that the 15x multiple paid, is toward the higher end of deals in this industry, but given recent history and success P&G had in materializing synergies on the 2001 acquisition of Clairol, I consider them logical. Based on a total enterprise value of 6.5 billion, P&G is paying 1.9x sales, 21x EBIT and 15x EBITDA for Wella. As a reference, P&G paid 3.1x sales, 16.5x EBIT and 14.9x EBITDA when it had acquired Clairol in 2001
Mode of Payment
P&G will be financing the acquisition with a combination of debt and cash and was not subject to any change form rating agencies, since at the time of the merger was about to get upgraded. It should be expected for the company to slow down its discretionary share repurchases over the next months.
Free Cash Flow - All Debt and Net CFs from Debt Financing Subtract: Interest Expense afte Free Cash Flow for Common E Present Value Factors PV Free Cash Flows
P&G decision to finance the acquisition largely with cash is consistent with the firms acquisition history; moreover it will permit the firm accelerate the acquisition process by improving the attractiveness of the offer. Based on recent stock repurchase program, P&Gs is not interested in diluting outstanding current stock price, maintaining P/E ratio, therefore making financing the acquisition with cash is the most attractive mean of payment.
Cash payment also provides the means to allocate excess cash in high margin-high growth opportunities and reinforces the portfolio approach of the firm. Ill expect Wella to became another flagship brand for P&G and improve return of the firm.
Post merger performance

Summary and Conclusion
2003 results for Wella indicate that after reasonable good delivery until the 3Q03, sales progressively deteriorated which combined with increasing restructuring costs in its Consumer division, in connection with the transfer of sales activities to its new owner Procter & Gamble Co, caused the firm to fail its estimates and generated an EBIT loss. Wella posted an EBIT loss of 195.2 million in its full-year, while sales increased 5% to 1.55 billion The companys largest division Professional, posted a EBIT profit, while the Cosmetics & Fragrances division posted an EBIT loss. Even with positive EBIT profit, the professional hair care fail to meet expectations in contrast with LOreal which improved by of 8.6% its estimates, probably pointing toward market share losses. Equally the deterioration in the consumer segment was surprising. The Consumer division posted an EBIT loss of 195.2 million on restructuring costs and other extraordinary items job cuts, site closures following the phased transfer of sales activities to P&G. Given the results obtained by P&G after taking control of Wella is clear that a complete assessment of the merger will be only possible until more time has passed by. Recent events indicate that P&G have started an integral restructuring effort. Synergy was not created in the first year of operations and is still unclear what the results are for second year. Management has departed from Wella and questions still exist on the firms projections based on recent historic losses. By all means I consider P&G, overpaid for the acquisition but still is capable of realizing synergies that will support the premium paid.
Appendix
Financial Statements
Balance Sheet
Cash Marketable Securities
Figures in 000
Sales Inventories Interest Revenues
IncomeReceivable - T Statem Accounts

Statement of C
NET INCOME, CON

Other Addbacks
Depreciation and Amort
INCOMEShares Out STATEME Common WORKING CAPIT A #DIV/0! message Market Price per Rece Sha (Incr.) Decrease in Sales Tax Rate (Incr.) Decrease in Inven Cost of Goods Sold
Share and Tax In Other Subtractions
BALANCE SHEET A #DIV/0! message ASSETS: Cash and Marketab Accounts Receivab Inventories Other Current Asse
CURRENT ASSET
BALANCE SHEET A #DIV/0! message i
ASSETS: Cash and Mkt. Secur Accounts Receivable Inventories Other Current Assets CURRENT ASSETS
Balance Sheet
Cash
Marketable Securities Income Statem
Accounts Receivable Sales Inventories Interest Revenues Other Current Assets

Statement of C
NET INCOME, CON

Other Addbacks Other Subtractions
Depreciation and Amorti
WORKING CAPIT INCOME STATEME Common Shares O (Incr.) Decrease in Rece A #DIV/0! message Market Price per Sh (Incr.)Rate Decrease in Inven Sales Tax
Share and Tax
BALANCE SHEET A #DIV/0! message ASSETS: Cash and Marketab Accounts Receivab Inventories Other Current Asse CURRENT ASSET Investments in Secu
Wella AG Forecast
FIRM NAME:
Well
Actua Comm Rate o
Actua
INCOME STATEMENT
Sales
2,8
common size
FIRM NAME:
BALANCE SHEET
ASSET Cash
LIABILITIES: Accounts Payable - Trade
common size
rate of change
Notes Payable - Non Trade
common size
rate of change
Current Portion of Long Term Debt
common size
rate of change
Other Current Liabilities

FIRM NAME: ANALYST NAME:
IMPLIED STATEMENT OF CASH FLOWS

The following statements of cash flows are derived from the above income statements and balance sheets, and are not the reported statements of cash flows.
NET INCOME Depreciation and Amortization WORKING CAPITAL FROM OPS (Incr.) Decrease in Receivables - Trade
FIRM NAME:
FORECAST VALIDITY CHECK D

Wella Valuations
VALU Wella
RESIDUAL INCOME VALUATIO FSAP OUTPUT: VALU Comprehensive Income Available FIRM Common Shareholders NAME: Wella for Book Value of Common RESIDUAL INCOME VALUATIO Shareholders' Equity (at t-1) Market-to-Book Approach Required Earnings FSAP OUTPUT:Income VALU Comprehensive Available Residual Income for NAME: FIRM Common Shareholders Wella Book Value of Common Present Value Factors Shareholders' Equity (at t-1) PV Residual Income Implied ROCE
Wella AG Forecast based on 300M synergies estimated by P&G
FIRM NAME:
Wella
Actual A Commo Rate of
Actuals
INCOME STATEMENT
Sales
common size
2,82 1
FIRM NAME:
BALANCE SHEET
ASSETS: Cash
LIABILITIES Accounts Payable - Trade
common siz
rate of chang
Notes Payable - Non Trade
common siz
rate of chang
Current Portion of Long Term Debt
common siz
rate of chang
Other Current Liabilities
FIRM NAME: ANALYST NAME:
IMPLIED STATEMENT OF CASH FLOWS

The following statements of cash flows are derived from the above income statements and balance sheets, and are not the reported statements of cash flows.
NET INCOME Depreciation and Amortization WORKING CAPITAL FROM OPS
FIRM NAME:
FORECAST VALIDITY CHECK DATA

Sales Gro
WELLA VALUATIONS BASED ON 300M SYNERGY ESTIMATES
VALUA Wella A
RESIDUAL INCOME VALUATION FSAP OUTPUT: VALUA Comprehensive Income Available FIRM Common Shareholders Wella A for NAME: Book Value of Common RESIDUAL INCOME VALUATION Shareholders' Equity (at t-1) Market-to-Book Approach Required Earnings FSAP OUTPUT:Income VALUA Comprehensive Available Residual Income for NAME: FIRM Common Shareholders Wella A Book Value of Common Present Value Factors Shareholders' Equity (at t-1) PV Residual Income Implied ROCE
Bibliography
R. F. Bruner, J. R. Perella, Applied Mergers and Acquisitions; Wiley Finance; Hardcover 2004. Clyde P. Stickney, Paul Brown, James M. Wahlen; Financial Reporting and Statement Analysis : A Strategic Perspective, South-Western College Publications; Fifth Edition; 2003. Pieter Krahnen, Reinhard H. Schmidt; The German financial system; Oxford University Press, New York, 2004. Hunt, Peter; Structuring mergers & acquisitions : a guide to creating shareholder value; Aspen Publications; New York 2003. J. Fred Weston, Samuel C. Weaver; Mergers and acquisitions; McGraw-Hill, New York; 2001. Patrick A. Gaughan; Mergers, acquisitions, and corporate restructurings; John Wiley & Sons, New York, 1996. Financial Times (London, England) November 20, 2002; Wella denies reports of Henkel offer; By UTA HARNISCHFEGER and KLAUS-MAX SMOLKA Financial Times; March 11, 2003 WELLA SHARES RISE AS HENKEL BUYS 6.9% STAKE PR Newswire; March 18, 2003, Procter & Gamble Acquires Controlling Interest in Wella Will Now Make Tender Offer for Remaining Shares Financial Times March 19, 2003 Wednesday; P&G seeks to reassure Wella chiefs By: NEIL BUCKLEY and UTA HARNISCHFEGER. The Deal, April 29, 2003 P&G raises its Wella bid; by: Andrew Bulkeley in Berlin Mergers and Acquisitions Journal; May 1, 2003; P&G Will Use Its Wella Acquisition To Accelerate Hair Product Innovation; By Joan Harrison. The Deal; May 12, 2003; Wella gives halfhearted nod to P&G; By Andrew Bulkeley PR Newswire; May 30, 2003, Statement on Tender Offer for Preference Shares in Wella AG ('Wella') by Procter & Gamble Germany Management GmbH ('P&G') PR Newswire; June 26, 2003, Procter & Gamble Announces Wella Tender Offer Final Results PR Newswire; July 9, 2003, Statement on Tender Offer for Preference Shares in Wella AG ('Wella') by Procter & Gamble Germany Management GmbH, a Wholly Owned Subsidiary of The Procter & Gamble Company Inc. ('P&G') PR Newswire; July 30, 2003, European Union Antitrust Authorities Clear P&G's Acquisition of Wella PR Newswire September 2, 2003, Procter & Gamble Closes Wella Transaction; P&G and Wella to Evaluate Collaboration Opportunities For Long-Term Business Growth
PR Newswire September 19, 2003, Statement Issued by Close Brothers: Harvard Professor Sam Hayes Critical of P&G Treatment of Wella Minority Shareholders The Deal, L.L.C. Wella minority digs in; By: Andrew Bulkeley in Berlin PR Newswire; April 26, 2004, Wella AG and Procter & Gamble Enter into a Domination and Profit Transfer Agreement PR Newswire European; May 7, 2004; Wella Appoints Procter & Gamble as Purchasing Agent PR Newswire; June 11, 2004, Domination and Profit Transfer Agreement Between Procter & Gamble and Wella AG Effective Associated Press Worldstream; Procter & Gamble names Wella chief Gurtler as group president AFX.COM; July 28, 2004 P&G, Wella to cut 1,500 jobs as they consolidate supply ops, close some plants Richmond Times Dispatch (Virginia); August 3, 2004; PROCTER & GAMBLE CO. DOW JONES; October 27, 2004 Wella slumps to loss in short FY on restructuring charges in Consumer division

Merger of Wella - P - G1

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Analysis Of The Strategic And Economic Rational Behind The Acquisition Of Wella AG By Procter & Gamble.

Prepared by Carlos U. Flores December 13th, 2004

TABLE OF CONTENTS COMPANY OVERVIEW 3

RECENT HISTORY LEADING TO THE MERGER STANDARD RATIO ANALYSIS

ANALYSIS OF THE VALUE PAID AND THE MODES OF PAYMENT

POST MERGER PERFORMANCE APPENDIX

Summary and Conclusion.....................................................................................................................................................23

Procter & Gamble

Carlos U. Flores Mergers & Acquisitions December 13th, 2003

Company strength and weaknesses

Procter & Gamble

Professional Hair C Consumer

Sums over 100% as

Source: Wella 2002 An

2002 Net Sales % of

Home products Health care

Baby & family care

Snacks & beverages

Source: P&G annual Report

P&G and Well

Carlos U. Flores Mergers & Acquisitions December 13th, 2003

Consumer hair care

Role of Merger & Acquisition in corporate strategy

Recent history leading to the merger

March 10, 2003

March 11, 2003

March 18, 2003

March 19, 2003

April 29, 2003

May 29, 2003

June 26, 2003

Carlos U. Flores Mergers & Acquisitions December 13th, 2003

July 30, 2003

Sep 19, 2003

Carlos U. Flores Mergers & Acquisitions December 13th, 2003

April 26, 2004

Standard ratio analysis

Carlos U. Flores Mergers & Acquisitions December 13th, 2003

Carlos U. Flores Mergers & Acquisitions December 13th, 2003

Analysis of the value paid and the modes of payment

COST OF EQUITY CA Equity risk (i.e. beta) Risk free rates

FSAP OUTPUT: FIRM NAME:

Free Cash Flow - All Debt and Present Value Factors

FSAP OUTPUT: FIRM NAME:

FREE CASH FLOWS FOR CO EQUITY SHAREHOLDERS

Post merger performance

Carlos U. Flores Mergers & Acquisitions December 13th, 2003

Sales Inventories Interest Revenues

IncomeReceivable - T Statem Accounts

NET INCOME, CON

Depreciation and Amort

Share and Tax In Other Subtractions

BALANCE SHEET A #DIV/0! message i

Marketable Securities Income Statem

Accounts Receivable Sales Inventories Interest Revenues Other Current Assets

NET INCOME, CON

Depreciation and Amorti

Share and Tax

Actua Comm Rate o

LIABILITIES: Accounts Payable - Trade

Notes Payable - Non Trade

Current Portion of Long Term Debt

Other Current Liabilities