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2017-07-18 09:00:03
DealBook: Why Nelson Peltz Wants P.&G. to See Him as a ‘Constructivist’

Nelson Peltz hates being called an activist, let alone a corporate raider.

The longtime financier, who has made his name investing in companies like Heinz and DuPont and agitating for change, prefers to think of himself as a “constructivist,” someone who doesn’t necessarily seek to break up a company, but rather to bolster its operations and corporate structure.

“The activists play the balance sheet by selling a division to buy back stock and leveraging the balance sheet and buying back more stock,” he once told Fortune magazine. “Any M.B.A. can do that. And most Wall Streeters do do that. We improve the earnings power of the company. Our background is in operations, not in Wall Street.”

To Mr. Peltz, this approach not only sounds friendlier: He believes he is friendlier. He will occasionally try to get others to describe him simply as a “highly engaged shareholder.”

It’s all part of Mr. Peltz’s effort to convince managements — and other shareholders — that he is not a quick-buck artist. With that reassurance, his thinking goes, they will welcome him into the room, and often onto the board of directors, with open arms.

“‘Activist,’ unfortunately, has taken on some negative connotations, and I really mean unfortunately,” he lamented at a conference last fall about the activist moniker and how he shouldn’t be labeled such.

On Monday, he made his latest play — starting what has been described as the biggest proxy contest in history — by seeking a seat on the board of Procter & Gamble.

And true to form, Mr. Peltz, whose asset management firm is called Trian Partners, couched his effort as friendly. On the first page of a 22-page presentation, he listed a series of bullet points about “what Trian is not pushing for.” Among them: “NOT advocating for the breakup of the Company; NOT suggesting that the C.E.O. be replaced; NOT seeking to replace directors.”

And yet, chief executives should take note that Mr. Peltz’s playbook is often the same: He makes a large, multibillion-dollar investment in a company and tells those in management that he supports them. He then tells them that he wants to meet with them because he has a couple of suggestions, some tweaks here and there. Then he shows up with a “white paper,” a thick deck of charts and numbers about changes he would like to see made. When the company fails to make the changes or take his suggestions seriously, he seeks to oust the chief executive or break up the company.

He has followed this playbook with various degrees of success over several decades on Wall Street.

His most recent influence can be seen at General Electric, where he was invited to make a $2.5 billion investment in the company as a sort of seal of approval in 2015. At the time, his firm declared, “Trian believes G.E. is executing a bold transformation that will generate attractive stockholder returns in the years ahead as the company reshapes its portfolio from a broad conglomerate.”

Two years later, Jeffrey R. Immelt, the chief executive of General Electric and a man whom Trian repeatedly called a “friend,” found himself announcing that he would be “retiring” from the company — just after G.E. missed its numbers.

Part of Mr. Peltz’s charm is that, unlike some other activists, he shuns using huge leverage, and he does not demand big buybacks and dividends. Instead, he often presses companies to increase revenues and encourages them to spend money on marketing.

All of which sounds nice and nonthreatening. He’s so charming that a proxy contest at P.&G. would be only the third time he has started such a battle — in other instances, he settled and got a seat or seats on the board before going public with his complaints. His presentations even include testimonials from chief executives of companies he had invested in, lauding him as an exemplar shareholder.

But it is worth noting that those chief executives are from the companies he has targeted that have subsequently found success. There are no testimonials from Mr. Immelt, or Ellen Kullman, the retired former chief executive of DuPont, or from any executives at Chemtura, a chemical company that went bankrupt after allowing Mr. Peltz’s team on its board.

None of this is to say that Mr. Peltz isn’t a good investor, or that, in certain circumstances, obstinate companies don’t need change. Often, old-line companies need someone to put some fire in their belly.

And Mr. Peltz is very good at that. His returns have nearly doubled the S.&P. 500 since 2005.

But there’s a rub: Once he cashes out, many of the companies he invested in lag in value, raising a meaningful question for shareholders about whether the changes he makes improve the company over the long term.

For example, two years after he cashed of out of G.N.C., the vitamin and nutrition company, the stock lagged the S.&P. 500 by 42 percent. Similarly, Sotheby’s stock lagged the S.&P. 500 by 41 percent two years after he exited the investment.

In fairness, a reasonable investor could argue that he can’t be held responsible after he leaves an investment. But this track record does suggest that companies in his portfolio may employ some short-term efforts to goose their results. Trian says it is a long-term shareholder that stays invested in companies more than five years — which is absolutely true, and far longer than most mutual funds. This column has highlighted how activists often get a bad reputation for going after short-term results, and Trian does indeed take a longer-term approach than most people appreciate.

Whatever the case, what’s clear is this: Mr. Peltz, despite hating the moniker, is very much an activist. And Procter & Gamble, which very well may merit a bit of pressure, shouldn’t be fooled about his intentions. The stock needs to go up, or the company’s chief executive, and perhaps other board members, will be gone.