Commentary

P&G Reportedly Girding For Activist's Assault

A looming question on the minds of competitive consumer packaged good marketers -- as well as investors -- this week is “Wherefore art thou, Procter & Gamble?” in light of the estimated $1 to $2 billion stake that “activist” investor William A. Ackman’s Pershing Square Capital Management has taken in the company.

Replacing CEO Robert McDonald and pressing P&G to cut costs more rapidly than it has been doing are likely to be the top two items on Ackman’s agenda, Emily Glazer and Kirsten Grind suggest in the Wall Street Journal. Given that Pershing Square’s stake is about 1% of the company’s market value, Ackman’s eventual influence will be measured by the support he garners from other shareholders. Glazer and Grind found at least a couple who welcome the development.

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"It's no secret that Procter has had some challenges,” says Bahl & Gaynor Investment Counsel portfolio manager Matt McCormick. “I think where Ackman is very good is identifying undervalued companies and providing a catalyst for them to go higher." And Neuberger Berman Group research analyst Jason Tauber tells them that "there's no question that there's a host of missed executions," saying "it's frankly very understandable that an activist has gotten involved."

Citing anonymous sources, Bloomberg’s Jeffrey McCracken and Lauren Coleman-Lochner report that P&G may soon hire both an external public-relations firm and investment bankers to advise them in fending off the demands of Ackman and other dissidents. They also say that the company’s Duracell battery and Iams pet food divisions are seen “as businesses where innovation is needed to justify keeping them” and report that P&G has spoken with advisers to assess outside interest in those assets.

“They tried to manage through the short term with price increases but finally realized they couldn’t do it, because competitors didn’t follow,” Peter Golder, a professor at the Tuck School of Business at Dartmouth College tells McCracken and Coleman-Lochner. “What they need to be most concerned about is losing market share. Only 10% of leading brands that lose market share ever get it back.”

Sanford C. Bernstein & Co. analyst Ali Dibadj, who has been a vocal proponent of cost-cutting at P&G and has advocated that the company consider a breakup if results don’t improve, feels McDonald is puttering too deliberately on the right road.

“Can it be fixed?” he told Bloomberg in a telephone interview. “Absolutely. Are they on the path to fixing it? I think so, but it’s just too slow.”

Slow and discreet is not Ackman’s game.

In a piece Friday, Reuters' Jessica Wohl and Svea Herbst-Bayliss took a look at Ackman and Pershing Capital, whose recent boardroom scrapes have included Canadian Pacific Railway, where he won a proxy fight in May, and J.C. Penney, where his hiring of Apple retail guru Ron Johnson to become the CEO “has garnered ambiguous results” thus far, as Business Inside puts it, and its revamped marketing program has come under fire.

“With most firms, Ackman likes to begin the conversation on a polite note, often volunteering to fly out to the company's headquarters from his New York base to meet with management and present his plans for improvement, people familiar with his past campaigns have said,” Wohl and Herbst-Bayliss write. “Ackman can also be seen to be pushy and impatient, which has cooled relations with some companies.”

Canadian Pacific is a case in point of the latter outcome, where “directors rejected both Mr. Ackman’s suggestion for a new chief executive and his analysis of the company’s performance,” as the New York Times’ Ian Austen reports. “The relationship completely fell apart in early January when Mr. Ackman told the board’s chairman, John E. Cleghorn, that “nuclear winter” would fall on the company unless Canadian Pacific agreed to replace its chief executive and accept Pershing’s slate of directors,” writes Austen.

Other major Pershing Square holdings, as of March 31, include General Growth Properties, Beam, Citigroup, Kraft Foods, Fortune Brands Home & Security, Howard Hughes, Alexander & Baldwin and Family Dollar Stores, according to Hedgetracker.com.

P&G is “a hulking target for an uppity investor like Bill Ackman, blogs Robert Cyran in Reuters’ “Breakingviews.” Typical activist tactics like a breakup won’t work at the $178 billion Pampers-to-Crest giant,” he says, adding that “new leadership could be one thing to help get P&G back on track.” Or even new, old leadership, suggesting that Ackman lure back retired CEO A.J. Lafley, who doubled P&G’s market value and hand-picked McDonald as his successor.

For its part, a spokesman says P&G is focusing on “returning to growth” and refuses to “comment on wild rumor and speculation.” And why should it when everybody else is happy to do so? At least until that rumored external PR firm starts earning its speculative keep.

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