In July, Bill Ackman revealed that his fund, Pershing Square Capital, held a significant stake in Procter & Gamble (PG). He said his fund owned $1.8 billion in common equity and options of the company. That accounts for around 1% stake in P&G. Ackman thought that it was a great company with 175-year growth history. P&G always led in market share growth and margins. But in the last few years, P&G has not performed well. Pershing Square purchased P&G for around $62 per share, at 16x P/E. It was a good price for a great business that was turning around. According to Ackman, it was a historically low multiple on depressed earnings.
Bill Ackman blamed Robert McDonald, the current chairman and CEO, for P&G's poor operating performance. In a meeting with Robert McDonald, Ackman laid out a 75-page litany of complaints, including poor results, eroding investors' confidence and sagging employee morale. He commented that a competitor, Unilever (UN) was run in a much more seamless fashion. He said: "If the company doesn't show any progress, they are going to hire a CEO from outside; I would say probably this time, from outside the company."
"From Outside the company"? Personally, I don't think so.
P&G has the most respected board in America, including Kenneth Chenault, Chairman and CEO of American Express (AXP); James Mcnerney, Jr., chairman, President and CEO of Boeing (BA), and Margaret Whitman, President and CEO of Hewlett Packard (HPQ). Many P&G's shareholders are company's employees and ex-employees, who are long-term investors. And since P&G was founded, it has never hired an outsider to run the company. Below is a brief about 12 leaders in 12 decades; all of them had spent lifelong careers contributing to P&G.
P&G started when William Procter and James Gamble met by accident when they were dating sisters. In 1837, each contributed nearly $3,600 to begin their partnership and establish Procter and Gamble Company. A century later, in 1930, William Cooper Procter stepped down and for the first time, a non-family member, Richard Deupree, took over as the company's chief. He had been the company's president for nearly 20 years. His heir, Neil McElroy, started his career in P&G's advertising department after having a bachelor degree in 1925 from Harvard. Howard Morgens began to work for P&G in 1933 as a salesman. Edward Harness joined the company in 1940. John Smale started in 1952. Edwin Artzt spent 41 years in P&G. John Pepper began to work in P&G in 1963. Durk Jager started in 1970, A.G.Lafley started in 1977, and Robert McDonald started in 1980.
P&G core philosophy is all about people. Richard Deupree once said: "If you leave us our money, our buildings and our brands, but take away our people, the Company will fail. But if you take away our money, our buildings and our brands, but leave us our people, we can rebuild the whole thing in a decade."
If Bill Ackman tries to come in and tell P&G how to run things and hire an outsider to run the company, I don't think he can do it successfully. Before, he tried to tell McDonald's (MCD) and Target (TGT) to spin off their real estate holdings into REITs, but his proposals didn't materialize and he was forced to walk away. Retail and turnaround expert Howard Davidowitz, chairman of Davidowitz & Associates commented in an interview: "He's (Bill Ackman) made a number of brilliant investments, I give full credit for his brain power and ability to recognize value, but you cannot mix that up with running a business." With the recent glitch, Davidowitz said that P&G, over the years, has proved that it could fix the recent glitch in 5-6 years' time. But if the company let some guy come in and urge to fix everything quickly, that was a problem.
Indeed, P&G board of directors restated its support last week for its CEO Bob McDonald. P&G board member James McNerney stated: "I, along with the entire board, have reviewed and support P&G's re-structuring, refocus plan which appears to be off to a good start. The board also wholeheartedly supports Bob McDonald as he leads its implementation."
So P&G has a history of having leaders who have spent their whole careers in the company. Shareholders and the company itself need a leader who has been in the company for several decades, who knows its culture and its way of operating. It might take some time, and I think Robert McDonald can lead the company's restructuring plan successfully.
Since Robert McDonald took over 3 years ago, P&G's stock price has been flat in the range of $60-$67. In June 2012, it dropped to less than $60 per share. When Bill Ackman announced Pershing Square's stake in the company, P&G's share shot up to nearly $70.
Historically, P&G was often traded at above 20x P/E, and now it is trading at around 16x forward P/E. In addition, in fiscal 2012, its EPS fell 1%, which was far less than the company's target of 5% to 10% growth, as it dealt with a $1.8 billion rise in commodity costs and stronger US dollar. However, with the market leader positions in many consumer goods brands globally and a $10 billion cost cutting program, I think P&G will prosper and benefit long-term shareholders in the long run. I agree with Bill Ackman that P&G is currently undervalued now. With the current valuation, investors can buy P&G and they should hold it for the long run.