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Too Big to Fail
The big question on investors' minds at this point is what is Ackman up to. A $2 billion investment represents about 1.1% of its market capitalization; to get to 5% would mean an additional $7 billion investment or $9 billion in total, approximately $1 billion more than the value of Ackman's fund at the end of March. That's a big bite to chew off even for a man with Ackman's appetite. Berkshire Hathaway (NYSE:BRK.A, BRK.B) currently owns 72 million shares, down 28 million from the end of 2007. Could it be that Ackman will seek the assistance of Warren Buffett to topple existing senior management. In a June interview with Becky Quick of CNBC, Buffett seemed to express some disappointment in P&G's inability to assess the willingness of its customers to accept price increases. Clearly, it's a business so big it doesn't even know its customers anymore.
SEE: Warren Buffett's Best Buys
Apparently P&G has hired or is in the process of hiring financial and communications advisors to deal with Ackman. McDonald and the board are feeling the heat after it cut profit forecasts three times this year. For those of you that follow Ackman, you know that he was successful in ousting Canadian Pacific Railway (NYSE:CP) CEO Fred Green and replacing Green with former Canadian National Railway (NYSE:CNI) CEO Hunter Harrison, who had settled nicely into retirement. Can AG Lafley be that far off? When Lafley took over the reins of P&G in June 2000, it was a mess. Nine years later he retired as CEO with the stock up 120% in that time compared to a loss of 37% for the S&P 500. Contrast this with the current CEO McDonald, who's seen its stock rise 39% in three years compared to a gain of 46% for the index. Ackman can be a very persuasive man and shareholders know this. If Pershing wants to take this the distance, I wouldn't be surprised if Lafley were to come out of retirement. Obviously this will take some time to play out but the mere speculation should keep the stock price buoyant.
SEE: An Introduction To Shareholder Activism
Along with the possible ouster of McDonald, there is the potential sale of both its pet care and Duracell businesses, which could fetch as much as $7 billion. P&G has 25 brands with $1 billion in sales, including Pampers, which is its first brand to go over $10 billion. It's not going anywhere. With over 50 brands in total, it has plenty of other potential divestitures. One that investors won't expect but should be considered is the grooming segment, which includes the Gillette, Mach 3, Fusion and Braun brands. In 2011, grooming accounted for just 9% of revenue and 14% of earnings. It's never seemed to gel since the $57 billion acquisition of Gillette in 2005. However, I'd hang on to the Oral B business because dental care's never going away as something important to your health.
SEE: Are Vision And Dental Plans Worth It?
The Bottom Line
I don't know if Bill Ackman can pull off his brand of activism against one of the world's biggest consumer products companies. However, it's obvious that the business isn't operating nearly as effectively as it should be and that always comes down to poor management. While this definitely will become a distraction for management, it's what's needed at the moment. Either McDonald and company get the scare of their careers and start doing a better job or the board brings in someone who will. This is definitely good news for existing shareholders or any one considering an investment.
At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.