News broke last week that Pershing Square Capital Management, run by prominent hedge fund manager and activist investor William Ackman, had accumulated a $2 billion position in Procter & Gamble (PG). Ackman hasn't come right out and said it yet, but it's almost certain he wants to try to oust CEO Bob McDonald.
This isn't Ackman's first attempt to buy big into a company and shake things up, but it's definitely his biggest.
A Very Active Activist Investor
Activist investors buy large stakes in publicly traded companies and use that shareholder power to try to force management changes or operating changes that will improve the company's performance, increase the company's share price, and thus increase the value of their own investment.
At just 46 years old, Ackman is already an old hand at this game, though his track record at turning companies around is far from perfect:
In 2011, he successfully broke up Fortune Brands Home & Security (FBHS), the conglomerate that once made everything from Jim Beam whiskey, to Titleist golf balls, to faucets and home-security products. Now, everything is gone except for the security and home products, and the share price has doubled.
In 2009, he unsuccessfully tried to force cheap-chic retailer Target (TGT) to split off its real-estate holdings into a separate company, spending a lot of money and denting his reputation in the process.
Most recently, after a $1.4 billion investment in Canadian Pacific Railway (CP), he ousted the CEO and replaced the entire board with members of his own choosing. Since the May 17 coup, the stock price has netted out to stay about where it was before Ackman's move.
Why Target P&G?
The consumer-goods giant has been struggling for some time now. Bob McDonald has been CEO of P&G for three years, and in the past two years, share prices have increased in the low single digits. In the meantime, share prices of rivals Unilever (UL) and Colgate-Palmolive (CL) have soared 18% and 27%, respectively.
And for the quarter ending March 31, earnings for P&G dropped 16.1% year over year, while revenue grew only 1.5%. Gross margin, a key measure of how well companies control costs at the manufacturing level, also tells a grim tale for P&G in relation to its peers: At only 49%, it pales against Johnson & Johnson's (JNJ) gross margin of 69% and Colgate-Palmolive's 57%.
Ackman believes McDonald has mismanaged the company and missed opportunities, so he likely wants him gone. Ackman is also looking at further cost cuts, which would address the margin issues as outlined above.
For $2 Billion, Limited Influence
With a market capitalization of more than $179 billion, P&G is a behemoth, and Ackman's seemingly massive $2 billion stake won't yield him the same leverage it would at a smaller company. His investment gives him about a 1% stake in P&G. At Canadian Pacific, $1.4 billion bought him 11%. This vast difference is what makes the P&G raid such a gamble.
Without being able to bring overwhelming firepower of his own to bear, Ackman needs to rally more mainstream shareholder support than he has needed in previous ventures -- and which, The Wall Street Journal reports, he seems to be doing.
Even Wall Street analysts, never a much-lauded lot, are giving Ackman a helping hand. On the company's last quarterly earnings call in April, they unleashed a withering barrage of criticism at McDonald's handling of the company.
On that same call, McDonald himself said: "These results are not as strong as we'd like." And while McDonald had no comment regarding Ackman's actions, a company representative did weakly venture: "We welcome investment in the company."
But clearly, no CEO wants this kind of investment, with the unrelenting pressure that comes with it.
John Grgurich is a regular contributor to The Motley Fool, and owns no positions in any of the companies mentioned in this column. The Motley Fool owns shares of Johnson & Johnson. Motley Fool newsletter services have recommended buying shares of Johnson & Johnson, Unilever, and Procter & Gamble. Motley Fool newsletter services have recommended creating a diagonal call position in Johnson & Johnson.
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