It was reported that Bill Ackman sat down with CEO, Robert McDonald, chairman and chief executive of Procter & Gamble on September 4, 2012. The Wall Street Journal (WSJ), dated September 27, 2012 stated “William Ackman greeted him with a 75-page litany of complaints about his three years at the helm of the consumer-products giant – poor results, eroding investor confidence and sagging employee morale, according to several people familiar with the meeting”. The article further states Mr. Ackman wants to strip Mr. McDonald of his board-chairman role and search for a new CEO.
Luckily for my readers I didn’t need 75 pages of analysis to show that Mr. McDonald is not up to the task. All I needed was 1300 words and 5 charts. (here)
Even though P&G has been hitting new 52-week highs recently, P&G has underperformed its’ peers Colgate – Palmolive and Unilever. I have included our model price chart below.
Procter & Gamble with weekly price bars, EBV Lines (colored lines) and model price (dashed line)
For those interested, a daily updated chart of PG subsequent to this post will be maintained on Facebook, here.
Major stories like this always leave me cold. Ackman’s fingerprints are all over this article as McDonald is cast in an unfavorable light. Is McDonald a bad CEO that is need of replacement? Stories, innuendo and personalities, are all very subjective when creating value for shareholders of Procter & Gamble however they make great reading and very prejudicial for a vulnerable subject such as Mr. McDonald. Objective evaluation is certainly better than subjective, and theoretical earning math certainly evaluates management better than when Mr. McDonald gets up in the morning or how he runs his management meetings.
To me, this represents the beginning of the end to Mr. McDonald. As I stated in my blog, “…a company the size of P&G is like watching an oil tanker in the middle of the ocean turn around – in other words this will take time. Will Ackman/shareholders give McDonald time? I think not!” With this WSJ article the ticking of the clock just got louder and without new tricks up Mr. McDonald’s sleeve to pacify both his board and Mr. Ackman, I don’t see Mr. McDonald given the time necessary for the turnaround however the board defines success.
By the way, I see this all the time in the business world, and through this blog I will point these situations out to you my readers. First, a company does a big acquisition for strategic, scale or management ego reasons. A substantial increase occurs in the acquiring company’s theoretical earnings. Underperformance occurs, because of the original synergistic gobbledegook never really materializes, specially compared to the increase in TE. Write-offs and reorganizations occur with new management. Value is recognized in the market place, of the reorganized company, because of the lower TE or benchmark. New management is heralded as geniuses to the business world. I’m I jaded, you ask? No, but when you see this cycle over and over again you have to begin to wonder what they are teaching in business schools.
Mr. A. G. Lafley, P&G’s previous CEO, did the big acquisition in Gillette back in 2005 and Mr. McDonald will have to pay the price, with his job as the cycle continues.
Maybe a more interesting question, even with a new CEO replacing Mr. McDonald, can he (she) change the relationship between theoretical earnings and estimated earnings in the future without breaking up the once mighty Procter & Gamble? This will be interesting to watch.