Change is on the horizon at Procter & Gamble Co., as activist investor William Ackman has entered the scene.
This story first appeared in the July 13, 2012 issue of WWD. Subscribe Today.
But the change may be faster and grander than Bob McDonald had planned, and several Wall Street analysts assert it could ultimately cost the chairman, president and chief executive officer his job.
On Thursday, the Federal Trade Commission gave Ackman’s hedge fund Pershing Square Capital Management clearance to take a stake in P&G. An FTC spokesman said the Hart-Scott-Rodino Premerger Notification Act requires clearance for investments of $68.2 million or more.
Ackman’s interest in the company is already being cheered by investors. P&G’s shares climbed 3.75 percent to close at $63.70 on the New York Stock Exchange on Thursday.
Analysts said an investment in P&G by Ackman, regardless of its size, would shake things up at the $82.6 billion company, which is confronting a slowdown in developed markets and market share losses. Last month, P&G cut its profit forecast for the final quarter of the fiscal year, citing a slowdown in developed markets in particular, as well as in China. P&G now expects organic revenue gains in the fourth quarter ended June 30 to be between 2 and 3 percent versus the year-ago period.
“This is an activist shareholder who is going to press for changes either in management or strategy,” said Javier Escalante, executive director at Consumer Edge Research. “This will put a sense of urgency on the board to make any changes that are needed and it opens the door to people outside the company.” He added that should the board ultimately decide to replace McDonald, P&G could be at a loss to find a successor internally. “There’s not an obvious successor within the company and that is a major issue,” he said.
Caris & Co. analyst Linda Bolton Weiser expressed the same concern, noting that many of the obvious successors left the company after getting passed over for the job when McDonald took the helm from A.G. Lafley in 2009.
In her view, McDonald inherited a lot of problems created at the end of Lafley’s tenure, but he should have aggressively tackled cost-cutting from the outset, and not waited until this year. In February, McDonald said the company aims to wring out $10 billion in costs by fiscal 2016.
Ackman was largely unsuccessful at bringing change to Target Corp. but has succeeded in shaking up J.C. Penney Co. Inc. Many financial observers have come to see him as a white knight of sorts.
“I have always wondered where the activist investors were,” said Connie Maneaty, analyst at BMO Capital Markets. “How could you have a large, established company like P&G underperform for so long, and nobody rabble rouse for better results? It’s a welcome development.” As for what Ackman’s involvement could mean for P&G and its management team, she said, “The company’s days of producing subpar results are numbered, and that could ultimately include a management change. I would like to see the pressure rise to the point where disruptive decisions have to be made. P&G’s evolutionary approach hasn’t worked. The company has become middle-aged. It’s got fat around the middle and it’s difficult for decisions to be made.” In her view, P&G has a lot of positives to build on, namely a strong creative ability, a pipeline of new products, management expertise that is often seen as the gold standard and a teeming portfolio of brands.
“There’s undervalued assets here. And so far the changes have only come internally,” said Maneaty. “Now external pressure is being added, and I think only good things are going to come of it.”
A P&G spokesman said of Ackman’s interest in the company: “We welcome investment in our company. We are focused on creating shareholder value by executing on our plan to deliver top- and bottom-line growth through our $10 billion cost savings program, renewing our focus on innovation, pricing initiatives and improved execution and reallocating resources to invest in the highest return opportunities.”
Stifel Nicolaus analyst Mark Astrachan would like to see P&G put a greater focus on its beauty business, given it promises better prospects from profitable growth. “Unfortunately, P&G has spent more and grown less compared to Unilever and L’Oréal.” He added that regardless of whether Ackman takes a position in P&G or not, “Stirring the pot isn’t a bad thing if it were to expedite the decision-making process at Procter.” He added, “Procter has a host of issues and most importantly, it continues to lose share” to its peers.