Brand giants face investor pressure

17 July 2012

NEW YORK: Major firms like PepsiCo, Procter & Gamble and Hewlett-Packard have all seen increased interest from activist investors, which can yield huge pressure for change if performance dips.

Pershing Square Capital Management, headed by William Ackman, last week took a stake of just over 1% in Procter & Gamble, the FMCG group, for $2bn, raising the heat on Bob McDonald, P&G's CEO.

Even though P&G has posted ten quarters of organic growth in a row, Matt McCormick, a fund manager at Bahl & Gaynor, told Bloomberg this "intensifies pressure on McDonald and his team to execute".

P&G has admitted "overextending" itself in portfolio and geographic expansion, reversed price increases in six US product categories, and faced criticism for being too slow in launching a cost-cutting drive. Dividing up the company, or selling certain brands, are among the solutions analysts have suggested.

Ackman also has nearly an 18% stake in JCPenney, the apparel chain, and was a key supporter of the recent appointment of Ron Johnson as its CEO. Johnson, moving from Apple, the electronics pioneer, has rolled out a radical transformation programme, albeit with mixed fortunes.

For its part, Relational Investors, led by Ralph Whitworth, was handed a seat on the board at Hewlett-Packard, the IT giant, after taking a 1% stake in the IT specialist, which had named two new chief executives in a single year.

Similarly, Relational Investors revealed in May that it possessed a 0.6% share in PepsiCo, worth $600m, and is thought to be advocating a division of the company if results do not improve.

"A lot of mainstream investors are unhappy with corporate America and more willing to make changes than ever before," said Joseph Johnson, a partner at Goodwin Procter, the law firm.

Nelson Peltz, of Trian Fund Management, has advocated sweeping reforms at organisations like HJ Heinz and Kraft, in the past. He currently boasts a 7% stake in Ingersoll Rand, the conglomerate, where he is again pushing for a restructure.

Peltz said at the Council of Institutional Investors last year that new corporate governance rules – like the annual election of directors and the introduction of advisory votes on compensation – meant once "untouchable" corporations with market capitalisations over $50bn could now be challenged.

FactSet, the research provider, stated that 24% of the 129 activist investor campaigns in 2012 thus far featured firms with stock valuations of at least $1bn, compared with 8% in 2009 and 11% in 2010, but below the 27% posted in 2011.

Elsewhere, Carl Icahn, who has attempted to drive change at Yahoo, the online operator, and attempted to buy Clorox, the household goods expert, last year, is at present involved with Navistar, the truck and engine manufacturer.

Data sourced from Bloomberg/Wall Street Journal; additional content by Warc staff