2017 – End of Year Editorial
Work, Success and Love
In England in the 60’s and 70’s, open professions of love were left mainly to the professionals, you know folks like Shakespeare and the Beetles. “I love you” was rarely spoken between people who actually loved each other. Within families it was practically unheard of . Growing up, if I had told my Dad that I loved him, he would have assumed that I was high, drunk or both. The first person to whom I professed love was my first serious girlfriend. The second person, I am still married to. Upon moving to the USA, however, I quickly learned that I had entered what can only be described as a love arms-race. Professions of love were hurled about with the ferocity and frequency only surpassed by the admonition to have a nice day. A popular reply to being told that “I love you” was to say “I love you more”. Yes, a literal love arms-race. Where would it end? What did it mean? What does “love” mean? Well, I don’t know, but it’s important and so I am going to write about it.
This blog was intended to be about success; how to achieve it for your self, your business, your colleagues and so on. We’d point to a few examples, mostly in the chemical business, derive a few formulas and then use this package as a theme for the coming year’s surfactants conferences. Simple. But I can’t help thinking back to last month’s blog about the super-heroes on Linkedin and that maybe it’s just consistent, unglamorous hard work on lots of little things that is the “secret”. Sure, be animated by a big idea if you like, swing for the fences if you must; but just execute and perfect your craft. The rest will follow. But what animates the work? What is the secret to being able to deliver your best day after day after year after decade? Fear? Greed? Love? I’m going with love. The other two, I’ve tried and I don’t like them much. I guess what I want to argue in this essay is that success builds on work and work is animated by love. We’ll try to keep it somewhat surfactants-centric with recent news items and, of course, we’ll listen to some great music along the way.
Let’s join (Canadian Rock Band) Rush on the last song of their eponymously titled first album released in 1974. As a young schoolboy studying for my “O-Levels” back in England, I fancied this song as one I could definitely identify with (“ got no time for livin’ yes, ‘cause I’m working all the time); laughable really, as I’d never worked a blue-collar day in my life. Nonetheless the lyrics stuck with me through the years I was pulling all-nighters on the consulting grind at Oliver Wyman (“It seems to me I could live my life, a lot better than I think I am. That’s why they call me the working man”). Take a listen. It’s a great heavy rock song from that era.
Fast forward just two short years to 1976 and the double live album All the World’s a Stage. Working Man is played as part of the encore (conjoined with Finding my Way – also off the first album) Take a listen now to about the first minute and a half. What changed? Everything! At 0:19 – some creative percussion, which goes on to permeate the whole song- and draws out the bass to help create some unusually complex rhythms for what is still your bog-standard 70’s rock anthem. What happened? Some of you know the answer already – that is Neil Peart happened. The new band member created the identity of Rush today with the insightful lyrics and multi-layered music. What’s notable is that instead of ditching this relic of Rush 1.0, they worked on it to make a great rock song truly brilliant and it became a staple of live shows for the next 40 years.
So what? We’re not done yet with this song. So let’s go forward now, 37 years from when the song first appeared on that first album. It’s Cleveland, 2011. The show is finishing up with the last encore. Listen and watch.
OK so, you have a bit of a different, fun intro. The original song comes back at 1:25 and then around 1:50 you have that guitar / bass interaction taken to another level (yes, sometimes clichés say it best). But there’s more! At 2:28, at the heart of that 1974 rock song, the guitar solo actually becomes perhaps the most perfect expression of what 3 men armed with only guitar bass and drums, can do. So, again, what happened in those intervening 37 years? Clearly a lot of work; these guys have perfected their craft and continue to tweak, to optimize, to get better. Success? Undoubtedly. Rush have attained a place in musical history, whether you like them or not – and in 1974, I can tell you that most people, especially the musical cognoscenti, most decidedly did not. Is this work animated by love? Clearly they like what they are doing and if you follow the band you’ll understand the heart and mind philosophy (again coming from Peart) that drives what they sing about – but love? Hard to say, honestly.[Extra Credit: From what other classic Rush song are the last few bars of this 2011 version of Working Man taken? Extra Extra Credit: What famous pop-star's band played an homage to this other Rush song at the end of one of said pop-star's live sets? Doubt you'll get that one, so here's the link.]
For more insight, let’s go to another band that came out of Toronto a few years after Rush, that is Triumph . Another rock band with some meaningful lyrics- maybe something in the air or the water in Toronto during those years. OK let’s watch (first a band clothing warning – it was 1987!).
Hmm…” Nothing is easy, nothing good is free. But I can tell you where to start. Take a look inside your heart…Fight the good fight every moment. Every minute every day. Fight the good fight every moment. It's your only way” .. Well, not exactly the “Babe I wanna make love to you all night long..” type lyrics favored by most of their contemporaries. In fact Rik Emmett could even be drawing on St. Paul, whose “I have fought the good fight.. I have kept the faith” in a letter to Timothy, has passed into the popular lexicon. So again, yes, work is necessary to obtaining anything good – at least according to another critically reviled, fan-loved band out of Canada. But again, love? Emmett comes close in skirting some religious imagery throughout the song but it’s t a tough argument to make, so I’m going to leave it there for now with Triumph.
Let’s stop wallowing in the past and come bang up to the present day with a change of genre – but staying in Toronto. I know nothing about Charlotte Day Wilson except that she’s my son’s favorite artist, she’s from Toronto and, at least from the video, seems to be way too young to be singing about work or love with any degree of authority. But she does, and incredibly well. This simple R&B song sings about a relationship that requires work – apparently a lot of it, judging by the repetition. The work is worth it however and it is motivated by love, but which came first, the work or the love “It's gonna take a little time. But with you by my side. I won't let go 'Til I've got what's mine”. Yes, I know I am reading way too much into this, but I honestly think the song is about work and love working together synergistically (yeah – it’s a business blog at heart!) to create a bond between two people. So, work needs love, needs work..? Yep, I think so.
OK Neil, I can hear some readers saying, enough already with the love stuff. You’ve given us the sob story (again) about growing up in England where no-one loved anyone but you loved Rush and now there’s this Canadian bird your son fancies. So what? What does this have to do with surfactants ? I think, a lot to do with surfactants, as we’ll see from the following 2017 news stories. But for now, you’ll just have to allow me that work needs love needs work and without work there’s no success. So, without love, there’s no success.
P&G and Trian – In the Arena:
Some folks feeling decidedly unloved at the beginning of the year were the P&G shareholders. And for good reason. This is it:
The P&G stock (in blue above) has trailed just about every conceivable benchmark, including peer group companies like RB, Clorox and Unilever. Shareholders (many, P&G retirees) would have been better off sending their money to Vanguard to stick in an index fund and forget about it. About 50% better off! This simple fact set the scene for one of the most gripping and fascinating business stories of 2017. And right in our business backyard, involving one of the biggest manufacturers and users of surfactants in the world.
One could quite justifiably have said at the beginning of 2017 that P&G’s owners were feeling, as Ronnie James Dio so adeptly intones in our next musical selection, mistreated by their hired managers.
Nature abhors a vacuum; and the vacuum here was the increasing gap between the blue and yellow lines on our stock chart above. Into the breach then marches Trian Investment Management LP, led by Nelson Petlz – to restructure the company and join the board . Or to “fight the fight they believed to be right. To overthrow the overlords” as Thin Lizzy may have characterized it.
Beginning with a story in the Wall Street Journal on, quite appropriately, Valentines Day, this is how the epic struggle went down.
On February 14th the WSJ reported that Trian has buiit up a $3Bn stake in the company. Already the WSJ sub-head refers to P&G as a turnaround case. This icon of branding, the progenitor of the soap opera, being called a fixer-upper in the mainstream financial press! P&G claimed to welcome the investment but I think everyone knew what was coming next given Trian’s record at companies like Heinz, Wendy’s and Sysco.
And of course, it did come in July. Between February and July, however, P&G made a couple of very public and, in my view, highly embarrassing, mis-steps, magnified by the Trian spotlight they were already under.
On the morning of April 4th, readers of the Wall Street Journal were greeted by the headline “Gillette, Bleeding Market Share, Cuts Prices of Razors” . Replete with words like “desperation” and “capitulation” the article lamented the essentially “too little too late” strategy of the P&G unit against upstarts like Harry’s and the Dollar Shave Club (recently acquired by Unilever).
On April 26th, the Wall Street Journal described a P&G earnings call as “baffling” due to the use of the phrase “irresistible superiority” 17 times by CFO, Jon Moeller. Both income and sales were down for the quarter. Analysts were skeptical of the “irresistible” concept and of ability of the company to expand market share as it planned.
On July 17th, after the aforementioned two public humiliations of P&G management, Trian launched a proxy fight in order to obtain a seat on the board. A week prior, P&G had declined to accept Trian’s request to appoint Nelson Peltz as a director of the company. David Taylor, P&G’s CEO for just on 20 months decided he did not need the help. Peltz, in an interview said “We need a game-changing attitude at P&G. We just can’t keep going along the same path,”, adding, in a superb example of damning with faint praise that he sees the board as “well-intentioned”.
The gloves came off and a war of words began in various media outlets. P&G positioned itself and lean, agile and already doing many of the things Peltz wanted. Peltz on the other hand accused the board of not moving fast enough and being unable to manage costs properly. Taylor said that Peltz “hasn’t offered incremental thoughts that we haven’t considered,” and “there’s a history of establishing a shadow management team which we believe firmly would derail the work that is already delivering improvement.” Peltz called Taylor’s comment “recycled public relations rhetoric. The real issues that must be addressed are P&G’s deteriorating market share and excessive cost and bureaucracy.” More of the same followed in the following weeks.
On September 6th, Trian published a detailed and damning indictment of P&G’s board and management in a white paper. Download it here. In factual and personal terms the paper laid out the faults of the company and management and what Peltz would do to turn things around. They actually name names which is quite interesting. On page 10 they list each director by name and show by how many percentage points P&G’s shareholder return has lagged its peer group, during that director’s tenure. On page 75, Trian lists P&G’s top 33 managers, by position only, and notes that only 3 of them had more than 3 years experience at another company before joining P&G. On page 30, Trian wonders out-loud why 6 named presidents of various P&G SMO’s (selling and marketing organizations) exist! The paper is a well researched and argued piece of work; convincing and, in many instances, irrefutable. Is it brilliant? Does it bring out incredibly original and never before discussed strategies? No. The paper could have been written by a team at any international consultancy like a Mckinsey or a Bain. What distinguishes this work and makes it particularly consequential is that it was preceded by a $3 Bn down-payment. Money talks and Trian’s fellow P&G shareholders would listen.
P&G’s response to the whitepaper (View it here), took the form of a press release on September 7th. They basically said that they are doing what needs to be done already. Peltz is misguided, wrong for the board and anyway wants to break up the company – even though he will never admit it. No charts or graphs. More of a slap than a knockout punch.
Tuesday October 10th was not just significant as the day of the P&G annual meeting and the day that around 2.5 billion shares were voted either for or against Peltz’s ascension to the P&G board. It was the day on which the nature of the Peltz / Taylor relationship changed permanently. After both sides spent around $60 Million on the proxy fight, Taylor declared victory to cheers and a standing ovation from shareholders attending the annual meeting. The tally was preliminary and extremely close. Peltz did not concede and pledged to wait until the final vote count was certified. In the meantime, Trian would keep the pressure on P&G management. The shareholder base at P&G has an unusually high level of individuals, including employees and retirees. Peltz admitted that the employees were a “solid front” in favor of management, however, even there, frustration was showing through. One retiree stepped up to the microphone during the meeting with the heartfelt question “What assurance can you give me, the shareholder, that the officers and directors that drove the company bus into the ditch are the ones that would get us out?”
It was at the end of the meeting, that Tuesday afternoon, that Taylor’s relationship with Peltz changed. Gracious in (temporary) defeat, Peltz came over to shake Taylor’s hand. Magnanimous in victory and with cheers still ringing in his ears, Taylor smiled and told Peltz “We’ll talk”. “We’ll talk but we don’t listen,” Peltz shot back. Taylor protested, “No, no, no, that’s not true.” And there it was, just like a couple in counseling “You just don’t listen to me!” – “No honey that’s not true” Taylor wasn’t going to ghost this girlfriend. They were now joined at the hip as the coming weeks would show.
At the close of the meeting, Trian became a kind of government in exile, waiting to pounce on any weakness while also patiently waiting for the final vote count. While still not conceding defeat, Peltz termed the board’s apparent victory “at best Pyrrhic”, while shaking his head saying ominously “If they’d gotten me gotten me on the board, would be no short term pressure”. As the meeting hall emptied were those still cheers that Taylor heard, or some other sound? We’ll see.
Taylor’s and Peltz’s words acquired increasingly sharp barbs. Perhaps each thought the other's words not quite genuine. "Words are like a certain person. Can't say what they mean, don't mean what they say"
Sure enough, within 10 days, P&G made another serious public error, or maybe it was just reality catching up with them. On October 20th, P&G reported yet another quarter of sluggish growth. Organic sales grew by just 1% and almost all of this in emerging markets. On an earnings call, CFO Jon Moeller admitted that they had been “unable to put a finger on why this has been”. Moeller dismissed all the usual suspects, even injecting some humor with a rejection of the “I want a new cellphone so I won’t wash my hair” consumer theory. 10 days after (prematurely) rejecting a serious and thoughtful shareholder’s request for a board seat was not a good time for the leading consumer goods company to admit that it had no idea why consumer sales were off.
25 days later on November 15th, proxy counting firm IVS Associates, published it’s official vote tally results. The shock reverberated around P&G Plaza and the world. Peltz had, after all, won a seat on the board. P&G management had popped the champagne corks prematurely and were now confronting that mother of all bubbly hangovers, their worst (business) nightmare, a barbarian inside the gate.
In full denial mode, Taylor admitted that Peltz “was leading” but reminded the press that the vote tally was still subject to a challenge period and that the company had not yet decided whether to enter into the hanging- chad (my words) phase of the contest. A month would pass as P&G considered its options. However I suspect that Taylor was gradually realizing that the sound he heard as he walked out of the annual meeting just over a month ago was not cheers but something altogether more unpleasant and relentless. Trian had P&G in a stranglehold and was not about to let go.
A couple of things about the above video. I saw Ted Nugent live in the late 70’s. The event was as ridiculous and over-the-top as the video suggests. But, just like Peltz, with his $3 bn, his white paper and his votes, that riff is hard to ignore. The relationship had changed (“You never listen!” – “Honey I do!”) and Peltz was getting his board seat one way or another.
On Friday December 15th, reality finally bit P&G and they elected Peltz to their board of directors. Not surprisingly, as in many such cases, love was in the air. Taylor gushed about Peltz “I found him, in the conversations we’ve had in the last many weeks, to be constructive and forward-looking,”. Peltz claimed that he and Taylor had “developed a strong relationship and I look forward to working with him and the rest of the board,”. Interestingly P&G said it and Mr. Peltz agreed the company wouldn’t take on excessive leverage, substantially reduce R&D spending or break up the company. Trian had never advocated these things and the breakup bogeyman was something management had used to try to scare its shareholders into voting against Peltz. Trian wanted to restructure P&G into three largely autonomous business units under a lean holding company and bring in substantial outside senior talent. So these ideas are now unambiguously on the table. In my view everything else is on the table too if it drives shareholder value. While I don’t necessarily see a breakup, if certain businesses are not core, spinoffs and carveouts will continue to be explored.
So what do we learn from all this? First you have to admire a guy like Nelson Peltz. He’s 75 years old and taking on Goliath in the public square on behalf of himself, clearly, and his fund’s investors. You can’t not admire David Taylor. He fought the good fight, bled P&G blue for what he believed in; but you have to wonder was he too emotionally invested in a version of P&G which was just not working in today’s markets? Should he have accepted the inevitable and co-opted Trian early on, like his counterpart, John Flannery at GE did (see below). My head (and hindsight) says he should have but my heart would have fought, like he did, to the bitter end, I’m sure.
What does P&G look like next year, in 5 ,10 years time? The P&G Chemicals question never, to my knowledge, came up in the debate between the company and Trian. P&G Chemicals is an important part of the company supply chain and would be a key supplier to two of the three independent business unites that Trian envisions (Fabric & Homecare and Beauty, Grooming & Healthcare). Will a fresh make-vs-buy analysis result in a different ownership structure for the chemicals business or will it be found to be strategically ill-advised to cut this cord. Looking at it even more simply; if you wanted to sell P&G Chemicals, who would buy it? Their largest customer by far is P&G. Whoever buys into that is going to have to have a plan to make that relationship more valuable at the same time that P&G is seeking to make itself substantially more valuable. The company would need to rapidly diversify its customer base and most likely its product line. Expect large PE firms to take a serious look. A number of them will have confidence that they could grow this, actually quite well run, business, into a standalone company worthy of subsequent strategic sale to a BASF or a Sinochem or an IPO in a few years.
Know when to fold ‘em
As mentioned above, at around the same time that Peltz and Taylor were slugging it out in the arena, Trian put their man onto the board of another iconic American company with barely any strong words being exchanged. You may have missed the story while the P&G drama was unfolding noisily on the front pages. Between May and October of 2015, Trian invested $2.5 Bn into GE, making the fund one of GE’s top 10 shareholders. Some constructive criticism was put forward by Trian, not the least of which related to a chronically underperforming GE stock. If you’d bought $1 of GE stock when Jeff Immelt became CEO in 2001, you would have have only 60 cents left by the time Trian made its move. $1 sent to Vanguard’s S&P 500 index fund would be worth $1.60 at the end of the same period. However, Trian did not push overtly for a board seat or the replacement of Immelt at the helm.
By June of 2017 Immelt decided to retire as CEO, but remaining as board chair, in favor of John Flannery, a GE lifer. On day one of his new job, August 1st, Flannery immediately started to shake things up with a cost-driven focus on operations, including ditching the much loved (by management) corporate jet fleet. Two months later, Jeff Immelt announced his immediate retirement from the board several months ahead of the previously planned schedule. Exactly one week after that on October 9th the day before the P&G shareholder vote, GE put Ed Garden, co-founder with Nelson Peltz, of Trian, on its board. This took some pressure off the board, according to the Wall Street Journal, although I doubt for long. Since Trian’s initial $2.5Bn stake in GE was accumulated, the stock was down 8% while the S&P was up 30%. In any case, with nary a whisper of resistance the activist investor was invited on board at the ailing company.
It’s not clear from their published biographies if either Ed Garden or John Flannery play poker. Flannery’s Wikipedia page lists the anodyne executive past-times of reading, golf and music. But clearly, Garden believed he had an ace and Flannery was not about to spend 6 moths and tens of millions of dollars on a proxy fight to find out. Easier to bring the outsider into the tent and see what he had to offer. It also occurs to me that while P&G’s management may have looked upon Nelson Peltz with the same mixture of horror and outrage with which my mam regarded Ted Nugent, the GE management may have seen somewhat kindred spirits at Trian in a similar way that a gang of bikers may identify with Motorhead. A long-winded justification for putting the Ace of Spades video into the blog.
Addendum: I could't help being fascinated by a small side-story about GE this year. Apparently as part of Flannery's digging into, and finally ditching, the corporate jet fleet, he discovered that Immelt had been in the habit of taking two jets on international trips. That is two jets, together, simultaneously for one person (Immelt) on one trip. Incredibly everyone, including Immelt himself claims to be unaware of this and blame was pinned on "fleet management". Every time Immelt went overseas, GE flew a spare plane along with his actual plane, "just in case". One man; one trip; two private jets. I found this story to be disturbing for a number of reasons, not least of which just the gross mismanagement of cost. If your ego is big enough to require two jets, then surely that second jet would be carrying something suitably egregious like, I don't know, a fawning press corps, red M&M's, your pet tarantula, a girlfriend or two. But no, apparently, after extensive investigations it was found to be just an Empty. Spare. Jet. How dull.
Star Cross’d Lovers:
The language and actions of love were thick in the air when Clariant and Huntsman, both important surfactant manufacturers, decided to merge in May of 2017. The talk was all about the friendship between the CEOs Hariolf Kottmann and Peter Huntsman and of course about the tremendous $400M synergies and a 20% EBITDA margin post-merger. Unfortunately the parents (ie the shareholders), particularly of Clariant, weren’t too happy with the kids' infatuation. Specifically they were just from different sides of the track (dividing commodity-ville from specialty gardens) and no-one could understand how they could make a go of it. Activist investment fund, White Tale built up a more that 10% stake in Clariant, specifically to block the merger and encourage Clariant to find a more suitable suitor – that is one that could deliver a bigger dowry. I write about this in some depth in my July 2017 blog and so I won’t repeat here. One can imagine the discussions back at their respective houses though, “those commodity people aren’t creative like us – all they think about is price and specification” . “it’s weird over there in specialty gardens. It’s all performance and formulation. You can never pin them down on a simple price and spec”. Of course the merger never happened as the discipline of the market was brought to bear on the unruly lovers.
Who better to capture the whole, tragic, tale than Tchaikovsky, drawing on Shakespeare. The classic love theme occurs around 14:00 but around 6:30 you can literally feel the emotional intensity of conflicted lovers bursting through the speakers. Listen to the whole thing. It’s worth it.
Babe I’m gonna leave you:
Our final love story involves another surfactant manufacturer and trial by investor activism. Elliott Management Corp built up a 6.7% stake in Akzo making it the company’s largest shareholder. They then in April of 2017 pressured the company to engage in serious merger discussions with fellow paint company, PPG who by that time had made three takeover offers for the company. Akzo resisted this pressure and instead opted to pursue a stand-alone strategy that involved splitting the company into chemicals and coatings businesses. The chemicals piece would be either sold or floated on the public market. I wrote about this in our June blog. As of today, it looks like the split is on track as Elliott and Akzo have reached a truce, according to Bloomberg. This to me indicates that the split is likely to happen. A chunk of Akzo’s surfactants assets came from the old Witco and some from Berol. A new home as part of a core business or a pure chemicals company may do them the world of good, kind of like breaking out of a humdrum relationship for pastures new. Robert Plant expresses this sentiment quite well, I think.
Wrapping up our dissertation, I’d like to make a couple more points. First the power of the rock ballad should never be underestimated in terms of its ability to convey the feelings associated with the complex and hard to control emotions of love. Here are a few examples (that, OK I could not work into the chemicals narrative thus far).
This 1989 song from Skid Row has absolutely no redeeming artistic or societal value except that it’s a great song. I challenge you not to get a lump in your throat.
A number of great things have come out of Germany, BMW, BASF, the largest chemical company in the world and B Round investor in P2 Science and, of course, the Scorpions. I think “schmaltz” is a German word and no band comes as close to rock schmaltz perfection as Klause Meine, Rudolf Schencker, Ulrich Roth and friends. Take a listen to this from 1985. Still Loving You.
To me, UFO comes across as a bit “spinal tap”–ish (google it) at times, but there’s no denying they can suck the air out the room and stop your heart with one of their ballads. Here’s Love to Love from a 1979 show in Chicago. I saw this same show in Newcastle the same year and I can tell you that for unabashed, un-self-conscious, un-ironic heavy rock, they were hard to beat. By the way, that's Michael Schencker, brother of the aforementioned Rudolf Schencker, on lead guitar (what, you think I just throw this stuff together?)
So, that’s it. I tried to come up with a song that ties this whole thing up in a neat package. I couldn't. So in these situations, we go to the Rush canon of work, stretching back over 40 years and pick out a Rush love song. They do exist! This 1982 song is about chemistry, which of course is what drives this blog. We play the song regularly at our surfactants conferences. The first half outlines the magical, mysterious, powerful aspects of chemical reactions. The second half draws a parallel with the how people connect with each other. Work, success, love? Yes, all that.
 The NME (New Musical Epxress- the achingly hip rock music paper in 70’s England) opined on Rush: “it's very difficult to write about such complete rubbish with any semblance of belief, without condescension or amusement...to review their albums is to get a headache.”