A Rising Tide is a Good Gamble
A Proposal for Management Change at Procter & Gamble
The case that Procter & Gamble's underperformance was a management problem rather than a portfolio problem: bloated cost structure, slowing innovation, and a board too patient with mediocre execution. Ackman proposes specific operational targets and a leadership change. The campaign contributed to the return of A.G. Lafley as CEO, an outcome Ackman accepted even though it was not his first choice.
“One of the great businesses of the world”
Summary
"A Rising Tide is a Good Gamble" — presented at the Ira Sohn Conference on May 8, 2013 — is the forty-five-slide public case Pershing Square made for why Procter & Gamble was a management problem hiding inside a great business. The deck does not argue for a breakup or a portfolio overhaul; it argues that P&G already owns the right brands, categories, and geographic footprint, but is under-earning because of a bloated cost structure, a convoluted organization, and leadership that had not integrated the 2005 Gillette acquisition. Ackman lays out a concrete earnings-power target: $6 per share by fiscal 2016, up from roughly $4, driven by 5% organic sales growth and a 24% EBIT margin. At a 20x multiple, that implies a $125 share price within two years, against a then-current price near $78. The presentation also carries an implicit governance deadline: if the current CEO cannot produce a sustainable turnaround, the board should install new leadership.
On the starting premise:
"One of the great businesses of the world"
— A Rising Tide is a Good Gamble, Ira Sohn Investment Conference, 2013
On the earnings gap:
"Vastly under-earning relative to its intrinsic earnings power"
— A Rising Tide is a Good Gamble, Ira Sohn Investment Conference, 2013
On the quality of the businesses:
"P&G participates in very high quality consumer categories that have strong profitability, high barriers to entry, excellent global growth opportunities, and limited private label exposure"
— A Rising Tide is a Good Gamble, Ira Sohn Investment Conference, 2013
On the brand portfolio:
"We believe P&G is uniquely positioned with 25 “billion dollar” brands."
— A Rising Tide is a Good Gamble, Ira Sohn Investment Conference, 2013
On why the problems are fixable:
"The good news is that most of these issues are readily fixable and that P&G’s brands and products are generally in a strong position"
— A Rising Tide is a Good Gamble, Ira Sohn Investment Conference, 2013
On the earnings-power target:
"Based on our view of appropriate revenue growth and operating profit margins, we believe that P&G should be earning closer to $6/share by FY June 2016 — a level more indicative of the company’s true earnings power"
— A Rising Tide is a Good Gamble, Ira Sohn Investment Conference, 2013
On the margin target:
"We believe P&G should earn a 24% EBIT margin — a substantial increase in profitability from its current EBIT margin of ~19%"
— A Rising Tide is a Good Gamble, Ira Sohn Investment Conference, 2013
On valuation if targets are met:
"If P&G can achieve its underlying earnings potential of $6/share by FY 2016, P&G would be worth $125 per share in approximately two years, including dividends"
— A Rising Tide is a Good Gamble, Ira Sohn Investment Conference, 2013
On the downside case:
"Even if P&G is unable to achieve its underlying earnings potential, we believe there is little downside in the stock as it trades at a discount to peers, despite having the largest cost opportunity in the sector"
— A Rising Tide is a Good Gamble, Ira Sohn Investment Conference, 2013
On the governance backstop:
"If P&G’s current CEO cannot demonstrate a sustainable turnaround in the near term, we believe the Board will do the right thing and put in place new leadership"
— A Rising Tide is a Good Gamble, Ira Sohn Investment Conference, 2013
Key Themes
- The Right CEO — the deck treats P&G's underperformance as a leadership and organizational problem, not a portfolio problem, and makes the board's choice of CEO the central catalyst
- Activist Premium — Pershing Square's presence is framed as a forcing function that aligns management, board, and shareholders around specific operating milestones
- Capital Allocation Discipline — the $10 billion cost plan, overhead reductions, and margin targets are the mechanism for converting sales into owner earnings
- Wide Gap Valuation — the $78 price vs. the $125 two-year intrinsic value estimate is the explicit risk-reward engine
- Simple, Predictable, Free-Cash-Flow-Generative Businesses — the thesis rests on P&G's leading brands and categories, not on a cyclical or speculative cash-flow recovery
Context & Significance
This is Act II, the golden era, but the tone is more boardroom memorandum than short-seller broadside. By 2012 Ackman had already run the CP Rail campaign and was deep in Herbalife; P&G represented a return to a classic, high-conviction long: a simple business with a durable moat, a clean balance sheet, and an identifiable gap between current and potential earnings. The mindset is optimistic-constructive: the deck repeatedly says the brands and categories are strong and the problems are "readily fixable." Ackman is not forecasting disruption; he is demanding execution against a benchmark the company itself had once advertised.
The honest retrospective note is that the $6 EPS and $125 target did not arrive on the original schedule. P&G did turn around, A.G. Lafley returned, margins improved, and the stock eventually outperformed, but the path took longer and involved more strategic reinvestment than the deck's 2016 earnings-power case allowed. The campaign also illustrates the activist premium in a more negotiated form: Pershing Square got board seats and a leadership change without a proxy fight, showing that the golden-era method could work through pressure as well as through public confrontation.