Deals

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

Nelson Peltz isn't pushing for a breakup of Procter & Gamble Co., but he should.

Trian Fund Management LP launched a proxy fight on Monday aimed at installing founding partner Peltz on P&G's board and correcting weak shareholder returns, lost market share and an "overly complex organizational structure." It was fairly direct about what it DOESN'T want to do to fix these problems, namely split the consumer-goods conglomerate apart or replace the CEO and other board members. Trian was less specific about the fixes it does prescribe. It's calling for "decisive action" beyond P&G's existing commitments to cut costs and eliminate bureaucracy. Oh, and that board seat. Ok then…

Show Me
Procter & Gamble has been trying to get back on more solid footing with investors, but they haven't been particularly impressed
Source: Bloomberg

Trian is justifiably frustrated. P&G's efforts to revamp itself with cost cuts, a flurry of divestitures and stock buybacks haven't worked. Meanwhile, P&G has been caught flat-footed by growing competition from Amazon.com Inc., upstart companies including razor maker Harry's and acquisitive rivals such as Unilever NV. P&G's stock has risen just 4 percent so far this year, trailing the S&P 500. Trian blames P&G's "structural and organizational bureaucracy," which seems like a fair criticism to lob at a $224 billion company. Whether that can be remedied by adding Peltz to P&G's existing group of 11 directors remains to be seen.

Per its filing on Monday, Trian met numerous times with P&G management since disclosing a stake in February. The company wasn't dismissive about its underperformance; rather, the board indicated that because it was already aware of the issues Trian had highlighted and taking steps to address them, Peltz didn't really need a seat at the table. Trian itself acknowledges that it's difficult to change a company's culture, and the task is undoubtedly harder when the company has been around as long as 180-year-old P&G. One outspoken board member might not be enough if directors are already more inclined to incremental changes.

Lagging Behind
Trian highlighted P&G's sub-par organic growth relative to consumer-goods peers
Source: Trian Fund Management, SEC filings

There's something to be said for an outside perspective and holding management accountable. The company was willing to consider Peltz's candidacy if performance was poor over the next year, but balked at setting firm benchmarks. While Peltz acknowledged one-year goals could encourage short-term thinking, he wasn't satisfied with that vague commitment. Thus, the endgame here may be to serve as a watchdog that gets P&G management to follow through. I will point out, though, that these kinds of collaborative relationships Trian prides itself on do occasionally lead to breakups as well, as seen at Pentair Plc. Every company is different, but if there was ever a case where more drastic action was needed, P&G would seem to be it.

P&G's slow-burn simplification strategy has gone on long enough and prodding from Peltz will still result in a company whose size is getting in its way. In the filing, Trian mentions overlapping organizational structures that classify P&G's business units by category, selling-and-marketing operations and corporate functions. That does indeed sound unnecessary, but once you address those back-office type overlaps, what ties Tide laundry detergent to Gillette razors?

A lot of the problems highlighted by Trian sound like the types of things that could be remedied by a breakup: "faster and more autonomous decision-making"; "increased management accountability"; "a more nimble, less insular corporate culture." Those are all things you get when you have two (or more) companies instead of one giant one. In many cases, we've seen a push for breakups on the grounds that smaller, simpler companies just work better, regardless of the valuation math. I would add that splitting P&G into one company focused on household products and another on beauty and health care would also free up management to make acquisitions of faster-growing rivals so that it doesn't miss out on the next Dollar Shave Club.

P&G has squandered its right to be a conglomerate, and both CEO David Taylor and Peltz need to come to terms with that.  

-With assistance from Sarah Halzack and Shelly Banjo 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Trian's initial investment case at Pentair was premised at least in part on encouraging the company to pursue accretive mergers and acquisitions. It did acquire Erico Global in 2015 for $1.8 billion, but now it's splitting into two parts and CEO Randall Hogan is handing over the reins to two new successors.

To contact the author of this story:
Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net