So, the result of Procter & Gamble’s epic battle with Trian Partners ended like the first Rocky movie (spoiler) – a points victory for the favorite after an unexpectedly close fight. Inevitably, there will be a series of sequels.
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CEO David Taylor earned cheers in the auditorium in Procter & Gamble’s hometown of Cincinnati when he announced the result, after adjourning the meeting briefly to allow proxy solicitors to scurry down the aisles looking for last minute votes. Activist Insight understands preliminary tallies will be out by the end of this week, with the certified results not available for several weeks. Trian says it has not accepted the result and litigation is being talked about.
Assuming the result is as stated, Procter & Gamble is wise not to be triumphant in victory. Taylor said he would continue to talk to Trian and offered to “change just about anything except our core values” to create value. A muted statement said the company was merely “encouraged” by the result and looked forward to continuing its “transformation journey.”
That matters, because few expect the company to be unresponsive. “The Procter & Gamble nominees won the election,” says Bruce Goldfarb of proxy solicitor Okapi Partners. “The ultimate result depends on the performance of the company.”
If the company managed to win sufficient support for its existing strategy, its thrusts at Trian’s record and proposals barely landed. “It’s hard to target these companies and even with these materials it’s hard to win,” Greg Taxin of Spotlight Advisors, which helps companies defend against activists, said of Trian’s campaign. “I suspect there’s going to be more change and more impact than the world recognizes.”
Indeed, change will come from one of two directions. During the campaign, Procter & Gamble relied heavily on the fact that it had a relatively new CEO and strategy. Both will be tested, starting with earnings on October 20. Guidance from management already suggests a pretty bleak quarter, with the lowest growth of the year and “headwinds from portfolio choices” and price reductions. How calmly the market reacts will determine how much pressure the board is under. General Electric (GE) this week gave Trian’s Ed Garden a board seat, though it was not enough to stop the stock sliding further on a mealy-mouthed defense of its dividend. Bernstein's analyst Ali Dibadj told me, “Knowing that half of its shareholders went against P&G, and many more are frustrated but trust David Taylor, I think the company will try harder to deliver on its numbers by cutting costs in improving the topline. I wouldn’t be surprised, however, if the company decided to do M&A to divert attention from its core struggling business."
The second source of pressure will have been what Procter & Gamble heard from shareholders on the campaign. Rarely does a board or management team hear so much or so clearly from the market as when canvassing votes in a proxy contest, and board refreshment is likely to be accelerated at the consumer products giant, based on hints it dropped in the week before the vote. It may be too early for other announcements but expect the company’s message to become a little bit more flexible now its back is no longer against the wall.
Reports suggest that Procter & Gamble still did much worse among passive institutional investors than DuPont did when it fought Trian two years ago, but was saved by a split decision among the big three holders – BlackRock, State Street, and Vanguard, with only the latter apparently backing management – and its retail shareholders. Okapi Partners’ Goldfarb told me yesterday that the apparent divergence of the passive investors was the result of different processes at each firm and “another demonstration that index fund owners take their roles seriously and make a considered review,” before adding, “There is not an alignment of views and you can’t take their decisions for granted.”
Article by Activist Insight
