The rock group The Who had a line in one of their iconic songs that applies to the recent leadership change at The Procter & Gamble Company (NYSE:PG) : “Meet the new boss, same as the old boss.”
The largest consumer-products company in the world just announced that its CEO for the last four years, Robert McDonald, will step down and be replaced by his predecessor, A.G. Lafley.
Lafley served as CEO from 2001 to 2009. One of his first tasks will be to find his successor. He is just a caretaker until a long-term replacement can be found. Another priority will be to reverse the company’s lagging growth trend. The Procter & Gamble Company (NYSE:PG) just announced quarterly results that didn’t quite match Wall Street’s expectations.
How will the unusual management shakeup affect the company, its many popular products and equity investors?
Company
Lafley’s previous tenure at Procter & Gamble featured some major acquisitions and mergers, including that of Gillette in 2005. It’s possible that the board of directors wants him to revert to his old ways and grow the company that way.
Lafley must also continue to address The Procter & Gamble Company (NYSE:PG)’s relatively high cost structure. More layoffs, part of a restructuring effort that was initiated in February 2012, might be needed to bring Procter & Gamble inline with its lower-cost competition.
Products
The company might have to refocus away from pricier products, such as the recently introduced Tide Pods. Although it has been a successful product that grew the top end of the laundry-detergent market, the net effect might have been to slow down growth overall. A hallmark of the McDonald era was an emphasis on higher-cost products.
Investors
The leadership change probably had its genesis when activist investor William Ackman began a push for McDonald to accelerate the cost-cutting program and deal with slowing growth.
Although the stock has appreciated by about 26% over the last year, Ackman, who holds a large chunk of The Procter & Gamble Company (NYSE:PG) shares in his hedge fund, felt more could be done. And in his mind, McDonald was not the person to do it.
Earnings will need to grow in order for the company to keep increasing its dividend over the long term, which it has done every year since 1956. However, the growth rate has slowed slightly in recent years. A good sign, however, is that the payout ratio is relatively low at 50%. The dividend should be safe, at least for the near term.
Bringing back the old
Some companies have had great success by bringing back former CEO’s to run things.
One of the best examples of this is at Apple Inc. (NASDAQ:AAPL). After being fired in May 1985, the late Steve Jobs was brought back to the helm in December 1996. While he was away, Apple Inc. (NASDAQ:AAPL) floundered and only gained about $1 billion in market cap. It released a string of less-than-stellar products that time has forgotten. However, after his return, Jobs presided over one of the great turnarounds in corporate history.
Fueled by iconic products such as the iPod, iPhone and iPad, Apple’s market cap exploded by 12,000% in less than 15 years. Since Tim Cook took over as CEO in August 2011, the company hasn’t enjoyed as much success, although it might not be entirely his fault.
Driven by market and economic factors and increased competition, Apple Inc. (NASDAQ:AAPL) has returned to mere mortal status. It is probably in that transition phase out of high- growth mode, but it still it has a lot going for it. People still love Apple products and are buying them in droves.
Another company that recently reverted to a former CEO is J.C. Penney Company, Inc. (NYSE:JCP). Former Apple executive Ron Johnson seemed to run the retailer into the ground over his brief tenure of November 2011 to April of this year. The stock price lost half of its value, even after a 30% gain within the first two months of Johnson’s reign.
In an interesting coincidence, Ackman, as a major shareholder of J.C. Penney, had called for the company to replace Mike Ullman, Johnson’s predecessor.
Ullman’s job will be to right the J.C. Penney Company, Inc. (NYSE:JCP) ship by reversing some of Johnson’s policies. Some of his first moves have been to offer more items at sale prices, expand the use of coupons and revamp the product line-up. Things have seemed to stabilize a bit after the change was made. The stock price regained 20% of its losses.
Conclusion
So if Lafley is successful in his two prime tasks, he can position The Procter & Gamble Company (NYSE:PG) for future growth and satisfy consumers and investors alike. Whether he can duplicate the Apple Inc. (NASDAQ:AAPL) turnaround under Steve Jobs remains to be seen. Ullman seems to have more of a challenge ahead of him to get J.C. Penney back on track.
The article “Meet the New Boss, Same As the Old Boss” originally appeared on Fool.com and is written by Mark Morelli.
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