Reference no: EM132977361

Nelson Peltz and P&G

More than most, Nelson Peltz is comfortable with dramatic change. As a legendary activist investor and partner at the Trian hedge fund, he instigated the transformation of DuPont into three independent companies after first combining with Dow Chemical. He forced the separation of Kraft into Kraft Foods Group and Mondelez International. He tried and failed to break up PepsiCo. He thinks big.

By early 2017, P&G was Trian's new largest investment, worth $3.3 billion. P&G no longer marketed food, Peltz's favorite business, but this was still his ideal target, a great company that had grown far too complex and needed shaking up. Dozens of its most famous brands-including Gillette razors, Crest toothpaste, and Pantene shampoo-were losing market share; all five of its product categories had lost significant ground to competitors.

P&G rejected Peltz's request to bring changes to the firm, so in July he announced a proxy fight. The ordeal proved expensive, nasty, and long. Taylor warned that by distracting management, Peltz could "derail the transformation we're leading." Peltz repeatedly attacked Taylor by name and enlisted former P&G CFO Clayton Daley to campaign against his former employer. The two sides spent lavishly, as much as $100 million, on the battle, and in the end, P&G won a two-month shareholder vote by the nearly invisible margin of 50.01% to 49.99%. The directors realized the victory was too narrow to deny Peltz a seat, and he joined the board this past March.

But the company is nowhere near the success Peltz wants it to be, a year after he battled P&G in the most expensive proxy fight in U.S. history and gained a board seat in March. P&G stock is a laggard, and Peltz's stake, recently worth $3.5 billion, is by far the biggest investment in $10 billion Trian. So Peltz needs it to perform much better if it's to help rescue him from the GE debacle.

With the board seat in P&G, Trian is pressing the boundaries of what can be accomplished at such organizations. In addition to bringing the activist's usual tools-breakups, cost cutting, borrowing-the firm is willing to delve more deeply into operations than any other activist and sometimes spends years helping management fix a business. As disruption threatens more big, old incumbents, Trian's success or failure will help define how much an activist, or any outsider, can hope to achieve in that hardest of managerial challenges, transforming a company that once ruled the world.

"Fix companies and turn businesses around-that's what we do," Edward Garden, 57, another Trian's partner told an investment conference in March. "We look for fundamentally great companies where management has gone off track operationally and where we think we understand what it takes to get the business back on track." If that sounds to you more like private equity, Trian agrees. "We think of ourselves as a new asset class," he said. " 'Liquid private equity' or 'hybrid private equity.' " The objective is to earn PE-scale returns without having to buy a whole company or a significant stake, as PE firms typically do; Trian owns only 1.5% of P&G and 0.8% of GE. By improving operations and holding positions for years, even without leverage, Trian hopes to generate higher returns and earn bigger performance fees than it could through trading alone.

The new reorganization is a helpful structural change, but P&G's problems go deeper. A long-standing strategy based on building mass-market national and international brands is at odds

with today's consumers who increasingly favor smaller, niche, and local brands. The rise of Harry's and Dollar Shave Club as successful challengers to Gillette, for example, caught P&G flat-footed-a new experience for the longtime alpha-dog company. More broadly, P&G's culture could sabotage any significant change.

Discussion questions:

1. Why does Edward Garden call the Trian hedge fund the "liquid" private equity fund? What is their strategy? How is it different from that of a hedge fund or a private equity firm?

2. What is a proxy fight? How is it different from a hostile takeover? What does Trian want to achieve?

3. Why do you think Trian's strategy to turn a great old institution like P&G around can be difficult?