• Daphne Chen Matthews

You Don’t Have to Brush Your Teeth, Just the Ones You Want to Keep

In this fictionalized scenario, if Colgate wants to buy Crest, and you are in the Mergers and Acquisitions (M&A) advisory business, could you advise Colgate? This type of question occurs every day at the biggest investment banks as well as smaller advisory firms. Both toothpaste companies are smaller brands of larger publicly traded companies. For private equity firms looking to make acquisitions, they may also be looking to acquire Colgate or Crest, and historically they do not use advisers.

Let us analyze the situation for any potential conflicts of interest.

What is your relationship with Colgate-Palmolive Company, the parent company of Colgate toothpaste? Let us say you have had no contact with the parent nor any of its subsidiaries. The person in your firm responsible for relationships in the Consumer Goods space happened to be chatting with a decision-maker at Colgate-Palmolive and they set up a call to discuss “some potential opportunities.” On the call, the decision-maker revealed Colgate-Palmolive was looking to expand its toothpaste portfolio with a friendly acquisition (not a hostile or unsolicited bid of a publicly traded company).

What about your relationship with Crest? Crest is owned by Proctor & Gamble, which also owns a slew of other companies in the Consumer space, including big names like Charmin, Gillette, Dawn, and Oral-B. Another person in your company, also responsible for relationships in the Consumer Goods sector, has an ongoing dialogue with P&G, but they have not spoken to the company in about eight months. At that time a decision-maker at P&G said they were not interested in any divestitures, but “keep the lines of communication open.”

If you are looking at the market capitalization, which is the value of a publicly traded company’s outstanding shares, at the time of writing P&G is much bigger than Colgate-Palmolive. You might have to perform a valuation of the toothpaste companies with respect to their parent companies. This is called a materiality check. Are the toothpaste businesses "material" to the overall company? That is, would a sale or acquisition by the toothpaste brands move the stock price of either company? How would the respective shareholders react if their toothpaste brand acquired another, or was bought by another?

The best outcome would be that P&G is indifferent to your firm advising Colgate to acquire Crest. After all, you have not spoken to P&G in some time and even then, the topic of dental hygiene did not go beyond the virtues of flossing after a spinach salad lunch.

You may need a business selection discussion in your company, with all the stakeholders involved. This may include the two individuals with relationships in the Consumer Goods space, as well as the individuals heading up the M&A business. But wait! What about Aquafresh, which is currently owned by GSK, a large pharmaceutical company in the UK? Does your firm have opportunities with them? Bring in the relationship manager for the Healthcare space. How will taking on this new potential opportunity with Colgate affect the current or future relationship with P&G and GSK? What are the economics of the transaction? That is, how much money are you going to make from advising Colgate, and does that offset any future business you might have with P&G and GSK?

A spark lights, and you recall that during your spinach salad lunch, P&G made a reference to a potential sale of Gillette (again fictionalized). How realistic was that discussion regarding Gillette? Would P&G still hire you to sell Gillette in the future if you are now hired by Colgate to acquire Crest? Perhaps you determine that you are willing to forgo any fees earned from the sale of Gillette, because it does not compare to the fees you may earn from the Colgate acquisition. Maybe Gillette is material to P&G and any divestiture is unlikely. As for Aquafresh, you determine that GSK is not focused on that brand at the moment.

In your industry, do you have clients who operate in the same space? With each potential opportunity, do you weigh the pros and cons on taking on the business? Is there an actual conflict of interest, or simply a selection between two or more business opportunities at a given time? Will taking on this business for one client adversely affect your relationship and prevent any future business with the other clients? Will this opportunity lead to more business in the future with this client?

Does your bathroom sink have space for two tubes of toothpaste, or are you tossing one out? Perhaps you can simply put one tube behind the mirror for the time being and focus on one.

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