Colgate: Brushing Mergers Aside


By David Kiley When Procter & Gamble (PG) announced its planned acquisition of Gillette (G), the splash that the deal made on Wall Street washed over the curbstones on Park Ave. where Colgate-Palmolive (CL) has its Manhattan offices. "What will Colgate do?" asked columnists, analysts, and arbitrageurs.

The answer: Probably nothing it isn't doing already. Surprised? You shouldn't be. No one who has watched Colgate-Palmolive Chairman and Chief Executive Officer Reuben Mark these last 20 years thinks that the mercurial exec will suddenly feel pressured to scoop up Alberto-Culver (ACV), SC Johnson, Reckitt-Benckiser, or Clorox (CLX) in response.

Investment bankers have been calling Colgate brass wanting the company to make a deal. But don't expect a rush to a deal, say analysts and a source close to the company.

HODGEPODGE OF CATEGORIES. Mark, 65, is in the midst of a restructuring program that will rid the consumer-products concern of the commodity laundry-detergent business, a move well under way as he gets ready to retire, presumably in 2006. The revamp allows Colgate to focus even more on oral care, soap, and deodorants. Mark has identified three internal candidates to succeed him: Co-Vice-Chairman Lois Juliber, Co-Vice-Chairman Javier Teruel, and Chief Operating Officer Ian Cooke. He has said his successor won't come from the outside.

For years, Mark has talked about "focus" rather than "scale" at Colgate, like a football coach who's obsessed with defense and leaves the offense to an assistant. But profit growth is slipping, the share price is stagnating, and Wall Street is tepid to the company. Along with limp product innovation and a limited product portfolio, Mark's strategy is being called into question as he enters his last months of leading the enterprise.

"One of my biggest concerns with Colgate is that its innovation lags its peers," says A.G. Edwards analyst Jason Gere. P&G, notes Gere, took its 1999 restructuring opportunity to expand into new categories, make acquisitions, and diversify its portfolio of products. "P&G is so diverse now with Gillette that it has balance to offset weak cycles with strong ones," Gere says. Colgate, meantime, is in a hodgepodge of categories outside its core oral-care business -- from pet food to hand soap to Murphy's household cleaners.

SEEKING GROWTH OVERSEAS While Colgate has roughly 35% of the U.S. toothpaste market (in dollar sales), P&G's share, at 32%, is nothing to sneeze at. In foreign countries, though, Colgate's share is much higher -- more than 80% in Venezuela, for example. But by any measure, P&G alone, and now bolstered by Gillette's Oral-B brand, has been outflanking Colgate in innovation and the expansion of the oral-care categories.

In the tooth-whitening segment, P&G has snared 51% of unit sales and a 70% of dollar sales, as compared to Colgate's 21% and 10% shares, respectively. Gillette's Oral-B has 26% of the manual-toothbrush market's unit sales, and this is now added to P&G's 6% -- as compared to Colgate's 21%. P&G's Spinbrush has garnered 40% of the unit sales of power toothbrushes, while Colgate has just 11% with Actibrush. These figures are provided by Information Resources and don't include sales through mass merchants, including Wal-Mart (WMT).

While Colgate's oral-care numbers in the U.S. range from vulnerable in its lead categories to weak in those it was late to enter, the company is concentrating on not giving up market share abroad, especially in developing markets where oral-care categories are still immature. Colgate recently noted in its fourth-quarter report that sales in Europe grew 24%, and volume increased 18.5%, with an acquisition adding 9.5% to both measures. In local currencies, sales climbed 19%, while volumes rose 13.5%. Operating profit rose 21%, excluding the effects of local currencies.

NOT MUCH HAS CHANGED. Colgate said product launches of Colgate Sensitive Plus Whitening and Colgate Oxygen toothpastes helped drive market-share gains in 15 out of the 16 European countries in which it operates. Latin America posted 6.5 % and 5.5 % increases in sales and volume, respectively, or 5.5 % and 4.5 % in local currencies.

Mark, who declined to be interviewed for this story, is very much an internationalist when it comes to his business. He has been relentless at racking up endorsements and backing from the American Dental Assn. and any comparable quasi-government/professional groups in developing markets. Colgate is also aggressive in providing education and heavy sampling in developing parts of the world. In short, Mark's attitude is that there's still plenty of market share to get in the world outside the U.S.

Although Colgate, with $10.5 billion revenues last year, is only one-fifth P&G's size, it has long been perceived as a closer competitor than it really is. That perception is the result mainly of the rivalries in tooth care between Colgate and Crest and in laundry detergent between Tide and Fab. It would be nice for Mark if he could rest on much better margins than P&G. But his 12.54% profit margin only barely noses out P&G's 12.09% margin, and P&G's operating margin of 19.16% beats Colgate's 18.92% by a hair.

Building scale through acquisition was hailed as the right strategy in the 1990s. Mark didn't follow. And while P&G was restructuring and underperforming in 2000 and 2001, Colgate was racking up consistent quarterly earnings gains. He can argue that the Gillette deal hasn't changed the climate much for Colgate. P&G is about five times bigger than Colgate now, and will be six times bigger after the deal is done.

EAGER DEALMAKERS. While mergers-and-acquisitions investment bankers are eager to sell Mark on a deal, some equity analysts are closer to Mark's thinking. "Mark is about to retire, and he's in the middle of a restructuring, so it doesn't seem a good time to do a major acquisition," says AG Edwards' Gere.

Meantime, Colgate stock has been trading in the low $50s, closing at $54.78 on Feb. 3, roughly 10% off its 52-week high. It hasn't been higher than $62 in two years, although good fourth-quarter results after the restructuring efforts began prompted a few upgrades from some analysts.

But in examining the P&G-Gillette deal, other analysts seem intent on driving some business from Colgate as well as from other smaller competitors like Clorox (CLX) and Kimberly-Clark (KMB) to the dealmaking side of their companies. "Besides creating what, in our view, would be preeminent consumer-products company in world, we believe it would underscore our thesis that suppliers need to either 'get big or get focused' in order to maintain leverage in an industry marked by retailer consolidation," CIBC World Markets analyst Joseph Altobello wrote in a note to clients.

Mark clearly feels Colgate is already focused and doesn't necessarily need to get bigger. A few truly innovative new products in its oral-care business, though, would go a long way toward convincing stakeholders that he's focused on the right things. Kiley is Marketing editor for BusinessWeek in New York


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