Procter & Gamble, Nelson Peltz Battle Heats Up With Focus on M&A
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Responding to intense criticism from activist hedge fund manager Nelson Peltz, Procter & Gamble (PG) - Get Report CEO David Taylor on Thursday asserted that company officials in its various units are empowered to consider buying smaller brands if they can show that bolt-on acquisitions can create value for shareholders.
Taylor's comments come in response to criticism from activist investor Nelson Peltz, who released a 93-page white paper on Wednesday arguing that Procter & Gamble has an insular culture that rejects outsiders and hasn't been as proficient as it could be in acquiring small, mid-sized and local brands.
The level of antagonism between Trian and Proctor & Gamble reached new heights over the last 24 hours as Peltz seeks to obtain a board seat at the packaged goods behemoth in what is shaping up to become the largest director-election battle in U.S. history, set to come to a vote on Oct. 10.
Speaking at a Barclay's Global Consumer Staples conference, Taylor refuted Peltz's assertions, arguing that P&G wasn't opposed to considering M&A or small brands acquisitions for many of its categories. He said the goal was to build from P&G's strong large existing brands, which include Head & Shoulders shampoo and Tide detergent. He added that all ten of P&G's ten product category units are "empowered" to look and consider smaller brands that serve specific consumer needs if they can find a way to create value for shareholders.
"The core is to build from these great brands we have and whether there is a bolt on, whether that is created by ourselves or whether that is through acquisitions, is available,' Taylor said. "We're not closed at all."
However, in a section of Peltz's white paper entitled ""Make M&A a growth strategy," the activist investor urged Procter & Gamble to be "proficient" in acquiring small, mid-sized and local brands and using research and development and marketing to "take them to the next level."
He argued that Procter & Gamble has an insular culture that rejects outsiders who can "come up with great ideas." The report suggested that P&G could make acquisitions to bring in new talent. Peltz argued that none of the company's 16 global business unit presidents appear to have ever worked outside of P&G and all have been with the company for 23 to 37 years.
P&G hasn't made many acquisitions in recent years and instead has focused on streamlining its product portfolio. The company has deliberately existed brands driven by fashion, flavor, and fragrance. Nevertheless, its various business units have created new brands, such as single unit dose laundry detergent, Always Discreet, Febreze car air products, and Unstoppable Scent Beads.
Nevertheless, even though Peltz is seeking potential more thoughtful acquisitions he also is pushing to eliminate what he sees as a "suffocating bureaucracy."
A key way to accomplish that, Peltz argues, would be through elimination of P&G's "matrix" organization structure, which Trian asserts hurts accountability and morale. The fund manager had said previously that its division leaders don't have the power to control their destiny, which he insists impedes growth and adds costs and complexity.
In his white paper, Peltz provided more details around how he hopes to shake up P&G's organization, arguing that P&G should be structured into three largely autonomous business units within one holding company. The move would shrink P&G's organizational structure, which is currently divided into four business units.
In a statement, P&G refuted Peltz's restructuring, arguing that it studied some organizational design structures previously, including one Peltz proposed in his white paper, and concluded that his approach would lead to "higher costs, lower efficiency, reduced profits and an added layer of management complexity." The company suggested that Peltz's plan appears to be a precursor to breaking up the company.
Activists often launch campaigns at complex conglomerates with a goal of breaking them up to make them simpler and easier for shareholders to understand. Nevertheless, Trian has repeatedly sought to refute that assertion, arguing repeatedly, and again in its white paper, that the activist fund is not advocating for the break up of the company.
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