VideoGillette Corp. markets its shaving products as "the best a man can get," but is its planned sale to consumer-products giant Procter & Gamble the best deal it can get? Regulators in Gillette's home state of Massachusetts don't think so.
Secretary of State William Galvin has launched an investigation into the terms of the deal that is testing the limits of how far regulators can go to protect shareholders and the public interest when a large company is pursued by an out-of-state suitor.
At issue is whether Gillette managers accepted a low-ball bid of $57 billion in exchange for massive payouts to approve the deal. Gillette CEO James Kilts stands to earn as much as $165 million upon completion of the merger. Galvin asserts that the managers have withheld material information from shareholders and that the company hasn't been honest about planned job reductions. "The huge payouts certainly raise a red flag," says Scott Harshbarger, the state's former Attorney General. "People don't like the idea of state regulators nosing around and asking questions, but the questions are appropriate." While Harshbarger insists Galvin is fulfilling his public duty by investigating the merger, he acknowledges that politics, and the fact that the state has lost two other major employers — Fleet Bank and John Hancock — to out-of-state acquirers, have figured into the inquiry.
Critics charge that Galvin is overstepping his bounds if his goal is simply to save jobs or protect against the loss of a massive corporate taxpayer, as some have asserted. After all, the purchase price included an 18 percent premium on top of Gillette's share price on the day before the deal was announced. "It's not the province of state governments to weigh in on a merger just to [protect against] losing a blue-chip company headquarters," says Bill Rodgers, a partner at Boston law firm Tarlow Breed Hart & Rodgers PC.
Gillette voluntarily released some information, but challenged Galvin's subpoenas. A judge ruled that the first set of subpoenas were indeed beyond the authority of the Secretary's office. However, the judge went on to say that Galvin has jurisdiction over the investment banks — Goldman Sachs and UBS — that issued fairness opinions on the deal and that information used to create those opinions is fair game. Galvin has since issued new, narrower subpoenas. He also subpoenaed four Gillette executives, including CFO Charles Cramb, after the company said it might have deleted E-mails related to the merger. (At press time, a judge had yet to rule on the legality of the new subpoenas.) Shareholders are expected to vote on the merger on June 14. —Joseph McCafferty
FX Effect
Companies looking to hedge against the falling dollar are finding the currency markets a little crowded these days.
During the past 12 months, mediocre performances by stocks and bonds have pushed financial institutions, hedge funds, and other traders into currencies. As a result, foreign-exchange trading nearly doubled in volume in 2004. With current daily trading volume of $1.9 trillion, FX is the largest of the world's financial markets.
The increased speculation in currency works to the advantage of corporate treasurers who rely on hedging to offset FX costs, because the increase in volume creates a more efficient market. "Although many people have observed that markets have become 'choppy,'" states Bernard Sinniah, global head of corporate FX sales for Citigroup, "the growing number of participants in the FX market has brought with it a larger pool of opinions. As a result, the risk of dysfunctional market movements has decreased."
Corporate treasurers are also using more currency options instead of forwards to reduce costs, says Justin Pettit, head of the strategic advisory group at UBS Investment Bank. "For longer-dated hedging two and three years out, out-of-the-money options can be more cost-effective," he says. —Harlyn Aizley
Reeling In Outsourcing Deals
Even as outsourcing turned into a dirty word, plenty of finance executives still viewed it as a necessary evil. More recently, some of them have begun to view it as just plain evil.
At least that's the conclusion of a survey released in April by Deloitte Consulting. "In the real world, outsourcing frequently fails to deliver its promise," wrote researchers, who surveyed 25 companies with average revenues of $50 billion. The study revealed that 70 percent of its respondents have had significantly negative experiences and are outsourcing business processes and IT with increasing caution.
While the survey hardly lays to rest the outsourcing debate, especially since it covers so few companies, there is growing evidence that large companies are rethinking massive outsourcing contracts. Big-name defectors that have unwound at least part of their arrangements include Conseco, Dell, Capital One, and Lehman Brothers.
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