Question

Osher knew that if he could establish a viable, growing battery-operated toothbrush product line, then Crest, in particular, might want to buy it. The Crest brand had lost share and had dipped to second place in oral care behind Colgate. Crest had a manual toothbrush line but not an electric one. If they put the Crest brand on Dr. John’s SpinBrush, then they could potentially increase sales of Crest toothpaste and other oral care products in addition to boosting sales of the SpinBrush. Crest also had a global distribution network that could add the SpinBrush and scale up quickly around the world. That was why John Osher originally went to Crest to explore the possibility of licensing the Crest brand. He thought they would like the product and buy the company, not actually license the brand. If they did decide to license the brand on favorable terms, it would dramatically limit the upside for Dr. John’s. Yes, sales might increase because of the brand affiliation, but no other oral care company would buy Dr. John’s. Because the Crest brand team had become aware of Dr. John’s and its rapid sales growth, they entered into negotiations to buy the company. As often happens in such negotiations, the Crest team couldn’t agree on terms with Osher’s team. Osher believed that the company would do much better than projected by Crest. They broke the impasse by agreeing to an earn-out, a contingent payment based on performance. Crest paid Dr. John’s a large cash payment and a potential bonus based on sales over the next three years. If Dr. John’s did well, Crest would pay more. John Osher and a couple of other team members agreed to continue to work on the project after it was purchased. John Osher and his team were prepared when they went into negotiations with P&G. When they sold the company to P&G, they had already designed the next three versions of the SpinBrush. They also had plans to license various characters ranging from superheroes to princesses to help market the toothbrush and used appealing designs, such as a race car design, to help sales. When a product similar to the SpinBrush was introduced, the team immediately introduced the SpinBrush Pro, a more sophisticated version with spinning and oscillating bristles.

Why is this a good deal for both Dr. John’s and Crest? Frame your thinking around the allocation of risk and reward.

Answer 1

Ans

This was a good deal for both Dr John's and P&G (Crest).

The strategic rationale for Dr John are:

1.  Dr John's did not have the resources and scale to launch and market the product in various geographies. Crest had a global distribution network that could add the SpinBrush and scale up quickly around the world.

2. Dr John's got a good value for their sweat equity in the company. P&G agreed to an earn-out, a contingent payment based on performance thereby Dr. John’s earned a large cash payment and a potential bonus based on sales over the next three years. This way the risk for P&G is reduced as it makes the bonus only if sales are high. Dr John also gets a good deal as it believes in the higher sales projection.

3. Spinbrush will now have backing of P&G in marketing and further product development .

The strategic raionale for P&G are:

1. Crest had a manual toothbrush line but not an electric one. If they put the Crest brand on Dr. John’s SpinBrush, then they could potentially increase sales of Crest toothpaste and other Crest products.

2.The Crest brand had lost market share and had dipped to second place in oral care behind Colgate. The introduction of electronic toothbrush will add to sales and get new customers.

3. Crest could leverage its distribution to scale spinbrush quickly.

Crest has reduced the risk of losing customer base in this evolving segment by making this acquisition. The product is already tested in the market and has tasted success so the risk of failure is much less.