By Shane Sokol
On July 11th, Procter & Gamble Co. (PG) common stock closed up with a gain larger than it has seen in over two years. On that day, news became public that William Ackman's Pershing Square Capital Management had two of its funds cleared by the Federal Trade Commission to purchase a large stake in PG, large enough to potentially affect the control of the company.
If the value meets certain minimums, the Hart-Scott-Rodino Antitrust Improvements Act of 1976 requires that before certain mergers, tender offers or other acquisition transactions are made, both parties must submit a "Notification and Report Form" with the FTC and the Assistant Attorney General in charge of the Department of Justice's Antitrust Division. The forms provide financial information and details of the proposed transaction. With this, the FTC and DOJ determine whether the proposed transactions violate the antitrust laws of the United States or whether it will have an anti-competitive effect after completion.
While the exact details in the filing are not made public, early terminations of the waiting period are made public and can be viewed on the FTC's website. The early termination approval (pdf) that was given to Ackman, confirms that the FTC and DOJ found no reason to prevent any transaction and he was granted the request for an early termination of the waiting period before any transaction could take place. In short, they are cleared for takeoff.
Mr. Ackman has had some important successes recently. He was instrumental in ousting the Chief Executive Officer of Canadian Pacific Railway (CP) after a proxy battle this year, helping to plot a new course for the company. Most famously in 2010, Ackman became the largest shareholder in J C Penney Co., Inc. (JCP) where he was able to join the board, shake up management and hire Ron Johnson away from Apple, Inc. (AAPL) to run the company.
The news of Ackman's involvement comes just three weeks after PG lowered expectations for both revenues and profits. Chief Executive Bob McDonald also admitted to serious missteps that he and others in management have made. It appears that Mr. Ackman believed now was the right time to join PG's other large shareholders which include State Street Corporation, The Vanguard Group, Inc. and Warren Buffett's Berkshire Hathaway and shake things up (see more of Procter & Gamble Co.'s largest shareholders).
The exact number of shares Ackman owns is not known and will not be until his next quarterly filing. However, he has called it his largest ever investment in a single company. To date, there has been no 13D filing, so we know he does not yet own 5% or more of the shares. In fact, he may never be able to own that much. At current prices, PG's market value tops $174 billion. A 5% stake at current prices would require an investment of almost $9 billion, more than the total value of Pershing Square's portfolio that we show with a value of $8.074 billion.
We can only guess at Mr. Ackman's intentions for PG at this time. Looking back through his history and the history of other companies in similar situations, we can come up with a few likely scenarios. A possible split of the company into pieces could free several business units to make their own way. Potential sales of entire business lines to other entities would bring in cash and create a leaner core business. A shakeup of the current management team is likely and PG's Chief Executive, Bob McDonald would almost certainly be among the casualties.
Investors seemed to like the announcement that Mr. Ackman was getting involved, causing a jump in the share price on Wednesday. Whether he will be successful at forcing changes at PG, only the passage of time will tell. He has had some extraordinary successes recently. But in choosing a company with a market capitalization topping $174 billion, he may be trying to tackle a company too big even for his ample abilities.
Disclosure: I am long AAPL.