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These days, the last thing you want to do as a CEO is attract the attention of an activist investor. Over the last few years, the term has popped up everywhere, and it seems big-stake shareholders are finding their voices more and more -- but only when things aren't going well. This American legacy company's CEO is now on the hot seat, facing major pressure from an overactive activist. Can the boss rise to the challenge, or is it time to hang up the blazer?
Soldier of fortune
For Bill Ackman, there is no target too large. The famed manager of the Pershing Square funds has gone after a list of high-profile companies, from J.C. Penney (NYSE: JCP ) to now-defunct Borders. As one can infer from the latter, his moves don't always pan out. But one thing Ackman is very good at is causing a stir.
His latest target is also his biggest challenge to date, at least by market cap. This summer, the hedge fund manager took a $1.8 billion position in Procter & Gamble (NYSE: PG ) . The classic American company, with 26 "billion-dollar brands," has faced increasing difficulties -- diminishing market share, fast-changing consumer trends, and eroding employee morale. In a recent meeting between Ackman and Procter & Gamble CEO Robert McDonald, the investor wasn't afraid to make his suggestion clear: Either fix the company or get out.
A few years ago, it may not have been possible for a fund manager to be so bold in their dealings with the CEO of a $190 billion company -- but the times they are a-changin'.
As opposed to some CEOs, who sit idly as their companies falter, McDonald is taking action to save his company/job. Recently, he announced major cost-cutting and product-refocusing plans -- the first of their kind for the age-old company. Announcing plans and improving results, though, do not always go hand in hand. And for Procter & Gamble, there are many ills to cure.
For three years, profits have been sinking. Just this year alone, the company reduced its earnings guidance a depressing three times. Lost market share for toothpaste in China and beauty products in the United States was the result of botched product introductions and redesigns. Lately, it seems that Procter and Gamble has lost its mojo -- being able to determine what consumers want before they even know.
CEO McDonald has pledged to turn things around. This year, he announced plans to shed around 4,000 jobs to save around $10 billion by the year 2016. He has outlawed capital allocations to anything but product-focused expenses. Just this June, he dictated that the company would place the majority of its focus on its 40 most profitable products.
So far, profits have ticked up a bit, but market share and margins continue to shrink. If McDonald doesn't start bringing the noise to the Procter & Gamble boardroom, you can bet that Bill Ackman will only get louder.
At the aforementioned meeting between Ackman and McDonald, it was reported that Ackman spent most of his time addressing two board members who are CEOs themselves: James McNerney Jr. of Boeing (NYSE: BA ) and Kenneth Chenault of American Express (NYSE: AXP ) . According to the report by The Wall Street Journal, Ackman insisted that the two top board members rid McDonald of his chairman status and begin looking for a new CEO.
Both men have stated that they are behind McDonald and his initiatives to turn around the company, but these things tend to change with the wind.
One thing remains for sure: Procter & Gamble is in a funk and in need of rescue.
A big bite
Forcing change at Procter & Gamble is quite different than Ackman's other initiatives, such as at J.C. Penney. At the beleaguered retailer, Ackman was successful in bringing in top-tier management to fix the company -- though at this point the company remains in shambles. The thing is, J.C. Penney is a $5.4 billion company -- a fraction of Procter & Gamble's size. Activist investors are gaining ground in the world of management, but this is truly a David versus Goliath mission for Ackman, and I am not totally sold on the notion that he can be the one-man army he thinks he is.
Since Ackman's involvement in the company, Procter & Gamble stock has risen substantially -- around 13%. Investors should keep an eye out, though, as the product-refocusing could turn out to be a successful move and bring back lost market share, boosting the stock price along with it.
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