Marvelous Merger Still Complicated

P&G-Gillette looks like a winner, but there are many issues for shareholders to consider.
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The company that makes your toothpaste decides to merge with the company that makes your razor blades. At a minimum, all the products you need to make yourself pretty or handsome (or pretty handsome) will now be managed under the same roof.

Presumably, the merger of

Procter & Gamble

(PG) - Get Report

and

Gillette

(G) - Get Report

is based on larger, more traditional monetary assumptions, but from my bathroom, it looks like a good deal.

With mergers, comes change, however. And while the bigwigs at the two companies work out the corporate kinks, Gillette shareholders will need to take care of their portfolios.

Presuming the whole thing is approved by the Federal Trade Commission, P&G shareholders won't have much to worry about. The deal, valued around $57 billion, was announced back on Jan. 28 and, minus some new product pictures in the annual report, P&G shareholders won't see any change in their shares, except for the some serious dilution (which we'll get to ina minute).

Gillette shareholders, on the other hand, will no longer see the big "G" on their brokerage statements.

Before we get to the technicalities, the first question you have to ask yourself is: Do I even want P&G shares?

To Stay or Go

Let's face it, not all mergers are good ones. (That's probably why 50% of all marriages end in divorce.) The AOL-

Time Warner

(TWX)

deal is the prime example of a merger disaster, but only the most obvious one.

So it's up to you to do some due diligence on this deal. Pull up P&G's annual report and read it. You'll be able to get a feel for the company if you read the opening text in the front of the report. The "letter from the president" and "management's discussion and analysis" will tell youwhere the company sees itself. Then decide if you see yourself with them. I think the synergies are there in the product lines as well as the internal cultures -- both firms support entrepreneurship and have a deep understanding of local markets -- but it's not my money.

If you want to drop the stock, do it before the actual merger date, which is slated for this fall. But if you decide to keep the shares and go for the ride, you don't have to do a thing.

The Nitty Gritty

The P&G/Gillette deal is actually pretty straightforward because Gillette shares will be exchanged for P&G shares. Things can get sticky when shares are exchanged for cash or a combination of stock and cash.

Gillette shareholders will receive 0.975 share of P&G common stock for each share of Gillette common stock they own, according to a P&G press release. That means if you have 100 shares of Gillette, you will have 97.5 shares of P&G once the deal is complete. Not too confusing.

Even better, your cost basis and holding period from your Gillette shares will be carried forward to your new P&G shares, says Stevie D. Conlon, senior tax analyst for CCH Capital Changes,a company that provides coverage of corporate actions affecting publicly traded companies. So as long as you hold on to the new shares, you don't have to do a thing.

If you decide to sell those new shares, you'll have to pull out your calculator to determine your gain.

Your cost basis in the new shares will take a little number crunching, but these days your brokerage firm and its technology should do that for you. But just in case, here's a quick example. Let's presume you invested $1,000 in 20 shares of Gillette stock and have not reinvested the dividend or added any more money since your initial purchase. In this instance, you purchasedeach share for $50. If postmerger, you end up with 19.5 shares of P&G (20 shares times 0.975), your new cost basis in each share would be around $51.30 ($1,000 divided by your 19.5 shares.) So be aware of your new basis before you sell.

On the tax front, since your holding period is carried forward, as long as you've held your Gillette shares for more than a year, any gains you generate from that sale will qualify for the beneficial long-term capital gains rate of 15%.

A big note: While most of us don't actually have stock certificates to correspond with the shares we hold, there are folks out there who may actually have Gillette certificates stashed away somewhere, notes GregoryGooding, partner with Debevoise & Plimpton LLP and a member of the firm's mergers and acquisitions group. If so, you'll have to send them in to the new company and P&G will send you new certificates.

Quick Note on Dilution

Whenever new shares are added to the market, existing shareholders will feel some dilution in their ownership of the company. Basically, they'll have to share their ownership with more people. So when P&G gives shares to the Gillette folks, the ownership of the company will inevitably be divided amongst more people.

To prevent that from happening too much, P&G is planning a stock buyback to remove some of the shares from the marketplace. According to a recent regulatory filing, P&G will borrow around $24 billion so that it can buy back its shares this fall. So be on the lookout for that news in the next few months.

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So as far as mergers go, this one is pretty straightforward, all around. And who knows, maybe Gillette shareholders will start to get Pampers and Tide coupons once everything is complete. If you have kids, that alone makes the deal sweet.