Are activists good or bad forces? Do they create wealth or destroy it? Who are the best activists?
These are the questions that swirl as we see today that Procter & Gamble (PG) narrowly defeated Nelson Peltz in his attempt to gain a board seat in what ultimately became a bitter proxy fight.
First, let me just say it can be case by case. There are some activists who scorch the earth and create ill will and not much else.
However, I think those days are largely behind us. Let's take a look at some cases and you will see what I mean.
First, let's take Procter & Gamble. This great American company has long been a favorite of mine, a company that has raised its dividend for 58 years. It is No. 1 worldwide in a huge number of brands and it is No. 1 in a host of products. However, there is no question that the company has lost its way this decade and rested on its laurels. I have no doubt that had Peltz raised his challenge any time from 2010 to 2015, he would have won as Procter had stalled out.
However, in the last two years David Taylor has led Procter and he's done a pretty good job cutting costs and trying to regain some momentum.
It hasn't been perfect. He's done a good job and the plan he has put in place is bearing some fruit.
Peltz doesn't agree with Taylor's approach because he doesn't believe execs have enough accountability, among a host of other issues.
I thought Peltz, who does so much work and has a very solid perspective on what it takes to build a successful business, not just a food business but any business, would be a welcome addition to the board. Procter's management disagreed and Taylor was vehement on Mad Money that Peltz would be dangerous short and long term.
He also questioned Peltz's own record at Trian. I thought it was a shame that it got so heated with Procter, surprisingly being the more vocal and the more harsh about what damage Peltz could do. I didn't see it that way. I have talked to enough executives who have done business with Peltz to know that he does terrific homework and has a very keen sense of what can make a business better.
But that wasn't enough and the voters went for the status quo. My take? I believe if it weren't for Peltz's involvement, this stock would be dramatically lower because the whole group has sold off except for this stock. I liked the idea of more accountability per division and I also liked Peltz's idea of buying and building smaller brands into bigger ones, the formula that has worked so well for PepsiCo (PEP) and Unilever (UN) .
I think the stock would have gone up if Peltz had been elected because many investors believed the company needed shaking up. But enough disagreed with Peltz that he failed -- although he contests the election. It's not surprising that the stock fell because of the vote. It would not shock me, however, if the company doesn't take some of Peltz's suggestions, especially in the purchase and development of smaller brands.
All that said, the biggest winner here is the shareholder. Any spur from the outside that creates more accountability is a good one. In the end, I think P&G was doing too well under Taylor for Peltz to garner a win even as I think Peltz's ideas made sense and were not dangerous at all. Anyway, he's only one man and he could have played a very good role as questioner-in-chief of strategic moves. I like that kind of challenge. Obviously the board didn't and, to some degree, that seems like insecurity and not continuity talking. They would have been better off with him than without him.
That's one of the reasons I am thrilled that General Electric (GE) just invited a Peltz partner at Trian, Ed Garden, to its board of directors. GE's far more troubled than Procter -- remember that one of the chief reasons Peltz lost has to do with a belief that Taylor's well on his way to getting more organic growth for PG -- and I think GE needs Trian's help more than ever. A fresh set of eyes from the outside can help new CEO John Flannery more than most realize. In fact, I was surprised that this stock fell on the news of the appointment and the departure of the CEO and several vice chairpeople. After all, Flannery won, he's the CEO, and he's going to pick his own people. I believe that getting Trian with all the rigor the company provides is a godsend for GE, but I recognize that the company's earnings estimates are probably way too high and the dividend is in jeopardy.
What a tragedy that this great American company made so many blunders in the last few years buying into oil at the high and selling finance at the low, among a host of other mistakes. It's another situation where activism, had it been listened to in the first place -- Trian was in the stock a lot earlier with a plan to cut costs more aggressively than previous management and I think the stock would be a lot higher had they been heeded.
My charitable trust owns GE and I've gotten this one wrong, thinking this company with all its terrific aerospace, healthcare and power assets would be doing so much better. Maybe under Flannery it can, but I made a big mistake buying this one for the trust and I sense that things could get worse before they get better despite the activism.
A third situation made better by activism that we heard from today? Honeywell (HON) . The big industrial has a better record than either GE or Procter, but when new CEO Darius Adamczyk came, replacing one of my favorite CEOs of all time, several activists clamored for a breakup of the company.
Adamczyk delivered just that, agreeing to split the company into a climate-control and safety business and a transportation business that's heavily into aerospace and autos. I think it will create a ton of value even as some expressed disappointment. Their disappointment is your opportunity as the unlocking here will create two companies that will be best in class but don't necessarily belong under one roof.
Finally, we hear today that Elliott Partners has taken a stake in hip and knee replacement maker Smith & Nephew (SNN) . Once again, this is good news for Smith & Nephew shareholders as Elliott can put pressure on management to conduct its business in a more rigorous fashion -- one of the firm's hallmarks. My trust owns Arconic (ARNC) , the company that spun off Alcoa (AA) and NXP Semiconductor (NXPI) precisely because of the pressure Elliott is putting on both companies to bring out more value. The former has no CEO since the departure of Klaus Kleinfeld and I think that's a sign that it could be taken over. The latter is a target of Qualcomm (QCOM) with a $110-a-share bid, and so far the bid has not attracted enough buyers, in part because of Elliott's push and the stock's at $114. If Elliott weren't saber-rattling, I think this company's shareholders would have succumbed to a $110 bid. (PepsiCo, GE, Arconic and NXP Semiconductors are part of TheStreet's Action Alerts PLUS portfolio.)
My conclusion? When an activist gets involved in a company, it's a good thing. The activists who have tried to bring about change in PG, Honeywell and Arconic may be disappointed, but as a shareholder you should be grateful. Believe me, all these stocks would be lower, maybe appreciably lower, without the pressure these funds put on management. And GE? It would be higher if previous management had simply listened to Trian and done what it said.
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