Procter & Gamble is a hulking target for an uppity investor like Bill Ackman. Typical activist tactics like a breakup won’t work at the $178 billion Pampers-to-Crest giant. New leadership could be one thing to help get P&G back on track, though. Maybe Ackman could even recruit vaunted former Chief Executive A G Lafley to help.
It’s generally easier to get in and get heard at a smaller company. Ackman’s quarry, for example, has tended toward the scale of $4 billion J C Penney, where he owns a quarter of the company. Even with a $2-billion stake in P&G, Ackman would have a mere 1 per cent of the US consumer goods maker. Bigger companies also attract more regular scrutiny, often making their market valuations more efficient.
Of course, a squeaky wheel can effect change by bringing attention to even a big company’s underperformance. Ackman has a lot to work with at P&G. Since Bob McDonald replaced Lafley as CEO in 2009, the shares are up 16 percent. The S&P 500 index, however, has gained more than 40 percent over the same span, and rival Colgate’s stock is up almost 50 per cent.
Shareholder aggression also requires a plan to win over other investors. Ackman did so at Fortune Brands by creating value with a carve-up. But the sum of P&G’s parts is worth between $175 billion and $208 billion, according to Sanford Bernstein. That’s not enough upside for such a wrenching upheaval. Reworking the balance sheet won’t help P&G either. And the company has a stellar record of returning capital to investors, having raised the dividend 54 years in a row.
That leaves management for Ackman to zero in on. Tighter cost controls are needed. P&G’s size and focus on big-brand products means margins should be significantly higher than peers. Uncharacteristic profit warnings and other slip-ups have come under McDonald’s watch, too. The sale of Pringles to Diamond Foods blew up partly for lack of properly vetting the buyer.
A change in the executive suite could be Ackman’s best hope. He poached Apple’s retail guru to try and turn around struggling J C Penney. Perhaps Ackman could enlist the retired Lafley, who doubled P&G’s market value during his nearly decade-long tenure, to return. James Kilts, the former head of Gillette, is another possibility. With P&G, though, if Ackman doesn’t go big, he’ll end up going home.
