The management at Procter & Gamble (NYSE:PG) is under pressure to improve the company's financial performance; its profits have fallen in the last three years. Bill Ackman, who acquired a stake of about 1%, is pressuring CEO Bob McDonald to improve the bottom line, or resign from his position. Ackman has been previously involved in similar transactions, such as when he acquired stakes in J. C. Penney (NYSE:JCP). Earlier this year, Ackman was successful in having the CEO of Canadian Pacific Railway Ltd (NYSE:CP) replaced. P&G seems to have a great business model, but it has been unable to control costs, and lacks efficient plan execution. The issue is likely to be resolved if the company achieves the targets set under its restructuring plan. If it fails to achieve these targets, CEO McDonald will most probably have to give up his position. The plan announced earlier this year to improve upon the company's financial performance seems strong and effective enough to bring in positive financial results for the company.
Procter & Gamble Co. is a large multinational company with a market cap of over $190 billion and annual sales of about $84 billion. The company has some potential in emerging markets, and lately, it has been shifting focus to these high growth markets. Emerging markets contribute close to 38% of total revenues, and the share has been growing over the years.
The company has been focusing on those businesses and markets that offer growth opportunities. Earlier this year, McDonald gave a plan for the future, according to which the company will focus on its 40 biggest businesses, 20 biggest new products, and 10 key developing markets. The 10 key developing markets include the markets of the BRIC countries (Brazil, Russia, India, China), which have grown at impressive rates in the recent past.
The company's management has been criticized for being late in entering emerging markets, and for the company's high cost structure. The company's growth in developed markets has slowed down because products offered by the company usually have premium pricing, and also because consumer spending is weak in developed markets. The company has failed to maintain its net income margin, which fell from 14.4% to 11.1%, and EPS fell from $3.36 to $3.12 in the last four years.
Going forward, the P&G management has to marginally bring down prices and also reduce costs, so that it could improve on its profit margin. The company's restructuring program includes saving up to $10 billion by the end of fiscal year 2016. Under the plan, P&G plans to cut 5,700 jobs by 2013. The job cuts amount to approximately 10% of the non-manufacturing workforce. Other cost-cutting measures include improving operational efficiency and cost-cutting in materials and packaging.
Recently, Bill Ackman, who purchased $1.8 billion worth of stake in P&G, has been pushing for the removal of P&G CEO Bob McDonald from his position. In a meeting on September 4, Ackman denounced the leadership of McDonald. Two other board members, Kenneth Chenault and James McNerney, were also present in the meeting. Ackman's hedge fund Pershing Square Capital Management, worth about $10 billion, invested 18% of the fund's holdings in P&G.
The board of P&G said that they had reviewed the restructuring plan and support McDonald as CEO. The company's board includes the CEO and 10 independent directors. In the last fiscal year, the board cut the CEO's pay by 6%. McDonald took over the office in 2009. Known for his strong work ethic, McDonald is working hard to improve the company's performance. Since the news of Ackman buying into P&G got public, the stock moved up by nearly 11%.
In our opinion, if P&G fails to deliver upon its cost-cutting plan and does not improve its margins, McDonald will have to step down from the position of CEO. It is being speculated that the fate of McDonald as CEO of the company will be decided on the next earnings release of the company. Potential changes in the management might jeopardize the company's restructuring plan, and also adversely impact its performance, which would help its competitors like Unilever Plc (NYSE:UL) to tap into the growth opportunities of emerging markets.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: The article has been written by Qineqt's Staples Analyst. Qineqt is not receiving compensation for it (other than from Seeking Alpha). Qineqt has no business relationship with any company whose stock is mentioned in this article.