Procter & Gamble Company: Mexico 1991

Abstract

This case looks at the alternatives P&G is evaluating to finance the growth of its Mexican subsidiary. The choices have different tax implications and risk profiles, which will be influenced by economic performance and currency movements.

Excerpt

UVA-F-1060

THE PROCTER & GAMBLE COMPANY: MEXICO 1991

Dick Druffel, associate director of Procter & Gamble's International Treasury Division, looked over the proposal from Procter & Gamble (P&G) (Mexico) to borrow an average of $ 55 million over the next three years. The funds would be used to expand and modernize P&G (Mexico)'s manufacturing capacity and to make strategic prepayments of advertising expenses. As part of P&G's globalization strategy, the finance needs of all P&G subsidiaries were coordinated through the head office in Cincinnati, Ohio, in order to “. . . finance the Company's global business at the lowest cost of capital consistent with taking acceptable risk.”

The proposal had been presented as a “talk piece” to senior financial management two weeks earlier, on October 6, 1991, and had received preliminary approval. Erik Nelson, vice president of financial operations, had asked for a complete written analysis of the proposal for the board's consideration in November. Despite the soundness of the plan, Druffel knew that convincing the board to agree to the financing package would be an uphill battle, depending as it did on the stability of the Mexican economy for at least the next five years.

Procter & Gamble

In October 1837, James Gamble and William Procter each contributed $ 3,596 to start the Procter & Gamble Company as a soap and candle manufacturer in Cincinnati, Ohio. The two partners had an eye on the future and, before their partnership was signed, bought land near the Miami-Erie Canal, close to the Cincinnati city limits, as a possible site for a soap and candle factory. Cincinnati's location—linked by rail with Cleveland, Ohio, and the major East Coast cities and by river to the Mississippi and thus the port of New Orleans, Louisiana—contributed to its rapid growth as a manufacturing and distribution center. P&G grew with the city and, by 1848, the company was showing an annual profit of $ 26,000.

. . .

Keywords: international finance diversity