Why Warren Buffett Will Back Bill Ackman
Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Bill Ackman runs Pershing Square, an activist hedge fund that buys significant stakes in companies to influence management decisions. His recent high-profile activist investments have included JC Penney, Family Dollar Stores and Canadian Pacific. His unique activist investment style is often compared with other prominent hedge fund owners.
On July 12th, it was announced that Bill Ackman was acquiring a significant stake in Procter and Gamble. Ackman’s history as an activist suggests that he might be using derivatives to leverage his position. Rumors indicate Ackman’s total position could be equivalent to $2 billion in P&G (NYSE: PG) stock. His activist investments have largely been successful, and his recent successes include Kraft (KFT), Fortune Brands (FBHS), and Family Dollar Stores (FDO). For a list, see Bill Ackman’s Favorite Stocks. At market close Friday, P&G’s stock has risen 6% since news of Ackman’s stake was announced on Thursday.
Taking an activist role in Procter & Gamble could be Ackman’s biggest bet yet. An investment of $2 billion in P&G stock only equates to about 1% of P&G’s market capitalization ($178 billion). This would make Procter and Gamble one of the biggest companies he has tried to influence. Discontent among P&G’s stakeholders could give more influence to Ackman to force out members of the board, senior management, or influence business decisions. However, given Ackman’s small stake, winning proxy battles still could be very difficult.
There are a few things going in Ackman’s favor. P&G has stumbled the last few years; it initially moved slowly in international markets, had difficulty containing costs, lost market share, and lost investor confidence with its drop in stock price (see below). P&G’s competitors include Johnson and Johnson (NYSE: JNJ), Kimberly-Clark (NYSE: KMB), Colgate-Palmolive (NYSE: CL), Unilever (NYSE: UN) and retailers’ store brands (i.e. Wal-Mart’s “Great Value” brand). P&G stock was down 8.17% at the end of June, while its competitors had positive appreciation throughout the year. P&G also had the lowest EPS and 2nd lowest profit margin of the consumer giants.
One of P&G’s main difficulties, increasing and retaining market share across its diverse product lines, has been of particular concern. P&G passed some of its higher costs to consumers last year, expecting its competitors to do the same. Instead, competitors chose not to raise their prices and P&G found itself losing market share (rapidly). As a result, CEO Robert McDonald was forced to report profit warnings on P&G twice in the last fiscal quarter, which was not taken kindly by the Wall Streets analysts covering the company.
Bill Ackman has a plan (which he’ll eventually reveal) on how to turn P&G around, but he’ll have to influence significant shareholders to vote in his favor. His track record in recent investments should help him persuade. His activist role in Kraft was speculated to have made a profit of 163 million from an investment of 630 million. This likely pleased another large shareholder of Kraft at the time, Warren Buffett. Buffett was Kraft’s largest shareholder in 2011, but he was also largely disappointed in Kraft’s acquisition of Cadbury in 2010. The decision in 2011 for Kraft to split into two segments (largely credited to activist investors such as Ackman) resulted in a favorable price jump and was well-received by Buffett. Both Buffett and Ackman likely see eye-to-eye on business decisions.
Buffett’s Berkshire Hathaway is also the largest individual shareholder in Procter and Gamble. Ackman has already proven beneficial to Buffett’s Kraft holdings. Considering both investors prefer long-term investments in a small number of companies, it isn’t far fetched that Buffett would back Ackman. The combined stakes of Buffett and Ackman would be impossible for P&G management to ignore. Ackman isn’t just betting that he can turn P&G around, he’s betting that Buffett will support him in doing it.
Given Ackman’s record, this is a call for P&G management to wake up, and that is great news for any P&G shareholder.
This article is written by Jeffrey Shek and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool owns shares of Johnson & Johnson and The Procter & Gamble Company. Motley Fool newsletter services recommend Johnson & Johnson, Kimberly-Clark, and The Procter & Gamble Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.