The news traveled fast last Thursday as investors learned activist investor Bill Ackman was quietly building a stake in Procter & Gamble (NYSE:PG). According to Pershing Square Capital Management, its $2 billion investment was the largest initial investment it's ever made. That's bad news for P&G CEO Robert McDonald, but good news for its shareholders.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

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

AG Lafley
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

Asset Sales
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.

Related Articles
  1. Economics

    Keep an Eye on These Emerging Economies

    Emerging markets have been hammered lately, but these three countries (and their large and young populations) are worth monitoring.
  2. Stock Analysis

    Is Pepsi (PEP) Still a Safe Bet?

    PepsiCo has long been known as one of the most resilient stocks throughout the broader market. Is this still the case today?
  3. Investing

    The ABCs of Bond ETF Distributions

    How do bond exchange traded fund (ETF) distributions work? It’s a question I get a lot. First, let’s explain what we mean by distributions.
  4. Stock Analysis

    3 Stocks that Are Top Bets for Retirement

    These three stocks are resilient, fundamentally sound and also pay generous dividends.
  5. Investing News

    Are Stocks Cheap Now? Nope. And Here's Why

    Are stocks cheap right now? Be wary of those who are telling you what you want to hear. Here's why.
  6. Investing News

    4 Value Stocks Worth Your Immediate Attention

    Here are four stocks that offer good value and will likely outperform the majority of stocks throughout the broader market over the next several years.
  7. Investing News

    These 3 High-Quality Stocks Are Dividend Royalty

    Here are three resilient, dividend-paying companies that may mitigate some worry in an uncertain investing environment.
  8. Stock Analysis

    An Auto Stock Alternative to Ford and GM

    If you're not sure where Ford and General Motors are going, you might want to look at this auto investment option instead.
  9. Mutual Funds & ETFs

    The 4 Best Buy-and-Hold ETFs

    Explore detailed analyses of the top buy-and-hold exchange traded funds, and learn about their characteristics, statistics and suitability.
  10. Stock Analysis

    The Biggest Risks of Investing in Netflix Stock

    Examine the current state of Netflix Inc., and learn about three of the major fundamental risks that the company is currently facing.
  1. Does working capital measure liquidity?

    Working capital is a commonly used metric, not only for a company’s liquidity but also for its operational efficiency and ... Read Full Answer >>
  2. How do I read and analyze an income statement?

    The income statement, also known as the profit and loss (P&L) statement, is the financial statement that depicts the ... Read Full Answer >>
  3. Can working capital be too high?

    A company's working capital ratio can be too high in the sense that an excessively high ratio is generally considered an ... Read Full Answer >>
  4. How do I use discounted cash flow (DCF) to value stock?

    Discounted cash flow (DCF) analysis can be a very helpful tool for analysts and investors in equity valuation. It provides ... Read Full Answer >>
  5. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  6. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!