Bloomberg Wealth: Nelson Peltz

We're just trying to get these companies to operate better the way they used to. We wouldn't be there if they really were doing well. Clearly they're not thrilled to see us. But what usually happens is that these stocks go up. Nelson Peltz and his try on fund management made a fortune being activist investors and some of the best known brands in America. Heintz When these Dupont PepsiCo Procter and Gamble model leaves and the list goes on I like fixing things. And I like throwing things. You can say it all began when he took a contrarian view toward traditional education. What I really wanted to do was skiing. So I left Wharton and I went up to Maine and became skipper. Eventually Peltz came home and drove a truck for his father's food distribution company. He ended up growing the company and making it the cornerstone of his own business. While I was running this food business I kept investing. I liked investing. And then I felt it was time for us to expand health to things like buy Snapple and Quaker Oats turn it around and sell it at Cadbury Schweppes. It became a Harvard Business School case study and in 2005 helped co-found that trial. We saw a great opportunity by having a fund that could make investments in bigger companies health and try on typically build up a stake in the company and eventually meet with management to discuss ways to fix the business. But he's not a fan of the term activist investor. So for those who don't know what is an active investor aware we're not on that to invest in. What we see is we see really companies that we think were once great have lost their way and that we have a plan for them to get back to greatness again. And that's what we do. We're not there to leverage up these companies. We're not there to split them up. We're not there to do all the terrible things that typically go along with the term activist. We're just trying to get these companies to operate better the way they used to. OK so what you typically do for those who don't know is you buy some stock in the company. That's a large public company. Right. Then when you own a stake and you become public in it you notify the CEO that you're a shareholder. Exactly right. And now you're an actor was OK when you when you notify this CEO and you say I'm Nelson Peltz I'm here to help you. Does he say geez I don't really need that much help. Or he says OK give me your ideas. Well the above OK. Sometimes no one is thrilled that we're there. Some are much more receptive to hear what we've got to say. We put together a white paper to go over with management. And that white paper stays private as long as we're in conversation and if we want a board seat when we think that they're ready to give us a board seat it will always stay private. But if. If they refuse to then we make that white paper public. All right. So of the 30 times you've done this or so how many times the CEOs say thank you for showing up I really want your advice and how many they say thank you but I don't need your advice. I can't tell you. But I don't remember anybody ever seeing the former. OK but not very often have they been as tough as you said on the ladder. Clearly they're not thrilled to see us. But what usually happens is that these stocks go up. And they go up nicely for the right reasons because sales have gone up. Market shares have gone up. Earnings clearly have gone up. And and we we tell them what we think they're doing wrong. The most recent one. Which is really interesting was Procter and Gamble. Procter and Gamble was about a 70 dollars stock. For almost 10 years and. The best the biggest consumer company in the world but really giving away market share here and there where wherever anybody was challenging them. We didn't think the company was structured properly. So we went to them and gave them a plan and said look you there's one CEO. No one has PML responsibility in this company anywhere other than the CEO. So there's there's really no ability to impact things because everything was a Matrix organization. We we gave them a structure. They rejected it. We had a proxy fight. We finally won our board seat and the shareholders won. So to decide what companies to invest in an infinite number of companies you could invest in. So how do you decide which ones you want to fix and help fix. Well the companies that we think we know something about their industries anything consumer including restaurants. Asset management companies where we've been in one from Legg Mason two times to to invest go to Janet Sanderson Mellon. We've been in all of those. So there there's a financials we call financials without balance sheets. OK. So when you make these investments you have an outside adviser that advise you McKinsey or Bain or BCG that help you come up with some plan to go forward in all internal. Well done here. So you have research team in New York because that's where your base and then in this office and in Florida. And when did you start a company. Well we started try and partners in 0 5. Before that I was buying companies like you did not with a fund but with vehicles or with capital that we can cobble together. And we did some very good deals back then. We bought what we created was American National Can which was the biggest packaging company in the world at that time. We bought Snapple from Quaker Oats and turned that around. We created national propane. So we've been do we did that on a single company where we own the company and then we decided to have a fund and that we saw a great opportunity by having a fund that could make investments in bigger companies companies that we couldn't buy. The first one we started with was Wendy's. The second one was Hines. And Hines unfortunately wound up to be a proxy fight. It didn't need to be. I got on the board. Bill Johnson and I became very good friends. Who was chairman and CEO who fought with with us. He optimistically wound up to be on our advisory board and he was our nominee on the board of Pepsi. So think about that. We we had a proxy fight and became very fast friends which usually is what happens. So let's go before we get back to more of what you're doing your background. So from your action it sounds like you're from New York. I'm from Brooklyn. All right. You're from Brooklyn part of New York. OK. So you're actually putting a special part. OK. So were you growing up in a wealthy family in Brooklyn. No I was growing up in a middle class family in Brooklyn. And what did your father do. My father had a produce and frozen food distributorship right in lower Manhattan the old Washington market. And it was doing about two million dollars a year in total volume. But he supported a family beautifully on it. So were you a superstar student in high school or a great athlete. Where were you most interested in. Well I thought I was a great athlete. That's for sure. I don't know that my coaches agreed with me but I was not a superstar student. I went to public school through the eighth grade. I went to high school went to Wharton. OK. I'm getting into Wharton. Isn't that easy. She must've been a pretty good student. I was. I got good college boards and I got to Wharton and. Really was quite bored at work and I felt that was the wrong place. What I really wanted to do was ski. So I left Wharton and I went up to Maine and became a housekeeper. What did your family say. Nelson. We really wanted you to go to Wharton and be a good student. You want to ski. I mean that's not what you're supposed to do. That's correct. They did say that. What did you do. You said I went. I. My father was an amazing guy. He was unhappy that I left Wharton. He was unhappy that I was a ski bum. And he wasn't happy that I grew a beard. But I did all of those things and. The snow melted in late spring and came back and I had a summer job offered to me in that are gone to help them and teach racing to young kids in Mt. Hood Oregon. And I needed some money to get out there. I asked him if he'd give me a job on a truck 100 bucks a week. Two weeks. That was all I needed. He said fine shave your beard off and do it. I said I would. So I shaved my beard off. And after. About a week on the job I started telling him things that I thought that were missed opportunities. And he set me up beautifully. He said why don't you stay here. And do what you want to do instead of going out to Mt. Hood aka. Why did and that's that's what happened. So when did you leave their family business and start your own company. What I did was I started to build that business. And I had a portfolio of bar mitzvah money and gifts and I started investing in the market and I started a little fund with my money and some of my family and friends. And we did pretty well. So while I was running in this food business I kept investing. I liked investing. And then I felt it was time for us to expand. When I came to the business we had no salesmen. I built the sales force in New York. Then I wanted to buy a company in Boston doing the same thing. We did. I put the money up for that personally became the largest share owner. Then we bought one in Baltimore. Washington. Another distribution house. And then one in Philadelphia. And then we were doing almost one hundred and fifty million dollars a year in business the largest food service distributor in Northeast at that time. Took it public sold it and then went on to doing other things. I think what what people don't understand is that we are making their portfolios better. Benjamin Graham is known as the father of value investing and literally wrote the book on it. But before that Graham was an early activist investor. Almost a century ago he gathered other shareholders and convinced a pipeline company to sell off the millions it owned in railroad bonds and other securities and then distribute those proceeds. Activists investors buy a chunk of a company's stock and then pressure management to make changes that may involve restructuring and selling off part of a company getting a seat on the board of directors or getting rid of certain board members activists. Investors will target companies that are poorly managed or operate inefficiently. Among the big names that have made their mark and activists investing are Carl Icahn. Paul Singer. Bill Akerman. Dan Loeb. And Nelson Peltz. In 2017 Peltz targeted Procter and Gamble. After IS Try and fund management took a stake in the company after a costly proxy fight. He won a seat on the board. Peltz argued that PNC suffered from a bloated structure and needed to be reorganized. PSG didn't follow all his suggestions but streamlined its operations cleared out its bureaucracy and improved its earnings growth. In the time Peltz was on the board the stock rose fifty eight percent making shareholders very happy. Now years ago I'd say in the 1970s and 1980s if you were trying to change a company from the outside. People said well you're a writer you're an activist you're not good for America and just let the board run the company the way the CEO wants to do it. And for that reason a lot of institutional investors never would invest with people that were trying to do what you were trying to do. Now how is the world changed. Because now you have in social investors many big public pension funds I assume. Why are they now so happy with what you do as opposed to twenty five years ago or so where they said we don't want that kind of approach because they want their portfolios to perform. And their portfolios haven't performed. You know the first quarter this year and I don't mean to pick on private equity that the S&P was down dramatically. And one of the private equity firms not yours. So I'm not so fast. You're some fat free and clear reported that their portfolios had a rough quarter and they were up 2.8 percent. Now 2.8 percent versus the S&P in the first quarter. Don't even look like one another. OK. But some of these investors in some of these institutions are happy with that. Because they can report what happened and they'll put that up 2.8 percent versus their public equities portfolio. At a certain point time that's got to change. OK. But I think what what people don't understand is that we are making their portfolios better. OK. We are making make a cap stocks. Nobody is going to buy TNG. Nobody is going to buy Unilever. OK. So there are only a few people who can have an impact on a company like that and have that which is probably those stocks and probably in 50 percent of. Have pension fund portfolios and that's what we that's we need to do so. Let's go inside the border and let's suppose you you win a proxy fight and or you just get invited onto the board. You go to your first board meeting and you're the person who's saying you can fix this company. And all of the others on the board of directors are saying well we're doing pretty well. How do you get received when you start saying here's what I want you to do. Well first of all we don't bring that to the board. Our time is spent with the CEO the chairman the CFO and share our plans with them outside the boardroom. We try never to solve an issue in a boardroom. It's always best done the day before the week before. Outside that room. We wouldn't be there if they really were doing well. So it's really hard for them to straight face and tell us we're doing well. And we presented with the plan. And that look at Hines which was our first really aggressive salvo we bought. We became a very large shareholder of Hines. We went to them with a plan. They didn't want any part of us. They didn't know who we were. And Hines had had a 10 year stint of flat to down sales and earnings the same. And what we saw at Hines very clearly is that. Every quarter every year their direct marketing spend declined. OK so everybody probably has a bottle of hides in the pantry. The key was how do you get it out of the pantry on the table and turn it upside down. That was happening. So what we did is we said you've got to raise your direct selling expense. Well why did it keep going down. You know yourself if there are if there are estimates of earnings in the next quarter and it's the middle of the quarter and your CFO comes running in and says we're not going to make consensus. There's very little that you have impact on in that quarter for that quarter except advertising spend. So what they did is they cut advertising spend made the quarter. But what was gonna happen in the next quarter. Where was the wind at their back for the next quarter to get sales going again. So what happened is when when we were all said and done at Hines. Advertising spend was about one and a half percent the sales. It's an app that's probably good. US steals it spends on advertising. When we left the company we sold it to Buffet and the Brazilians. It was spending close to 5 percent to sales and we had 36 straight quarters of organic sales increases. There was no other consumer company could say that. Suppose you buy stock in a company and you say I'm not going to go on your board. I just want to give you my advice. I'm not really ever interesting going to board. You think you would have that much impact. We do do that sometimes. So sometimes you don't want to go on the board. It's done a matter of wanting to it's a matter of how receptive management is to our suggestions. Ferguson is a company we bought a lot of stock in. Never got on the board never asked for a board seat really had a great relationship as we do today with management no knees no need no need for us to go on the board one at one point. We with the largest share owner of Domino's. We didn't. We spent time with those guys did not feel that they needed us on the board and they did great things. We sold the stock too early but made a lot of money on it. But so we have those relationships at times I think cash flow stability good quality companies. When this is all over are gonna be valued once again. As we talk today the U.S. economy is maybe soft a little bit it's not going to grow at the rates that we would all like and maybe we're actually going to go into recession at some point. Inflation is high. How does that affect your business. Well it affects every business. The problem that we all of had. Those of you who invest in public securities as opposed to private ones. Is that unless you're in 12 of 14 stocks. It was really hard to keep pace with the S&P over the last five or six years. It was ridiculous. All of the gains came in. That doesn't aso stocks. Today I think there is a reversal. I think even though we're gonna be in a recession I think cash flow. Stability good quality companies when this is all over are going to be valued once again. And those are the kind of companies that we invest in the boring companies. They're they're really wonderful companies that generate cash. Just need to be treated properly and have a good plan. And those are the companies we like. So the great pleasure of your financial career is building a kind of type of investing business that hadn't really existed before quite this way. That's correct. And look I know we did the first. The first LBO takeover that every actually closed before that they were all green mail. I didn't want agreement. I want to own the company and run it and have it grow. And we were able to do that. So I've known what it is to be CEO and running one of these businesses and ISE. I have spent most of my career running businesses meeting targets setting projections. And it wasn't until just 2005 where I became what you would call an activist investor. So I understood. I understood what these people had to do. I understood what it meant to report through a public. And to have annual meetings and to stand up there and take the questions. So if somebody is watching this and says I want to be the next Nelson Peltz I want to I like what kind of business he's doing. He's making companies more efficient by shaking up their process a bit. What would you say the skill set is at the drop out of college. Is it to have a good head for numbers. Is it to really have an outgoing personality. What is it that you really need to do. This kind of business I think gets all of the above. OK. And you have a good sound. Good luck. Good. But I mean let's suppose somebody says I'd like to do what Nelson Peltz says but I'm I'm a little shy and I really don't like confronting people. And I'd like that kind of you know just maybe be polite all the time that people would never actually tell him something I want to hear. That's not going to work. I should go. And technology different business. OK. So in your career what was the best investment advice you ever got. Somebody ever give you some great investment advice. Says sales up expenses down. That's your best advice. My father told me that and that's why when I dropped out of Wharton I knew I didn't need to know much more. If somebody said to you what are the biggest mistakes that U.S. investors make. What would you say the most common mistake that investor makes. I think they lose sight of their own. Common sense their own judgment and start to get swept up in a tide of euphoria. I think that's what happens. And you know without mentioning any specific companies and have stock in one. I mean there are companies today. Finally the market woke up to them. But they had 10 plus years of phenomenal market share growth and never generated one dollar of free cash flow. And they did it for 10 plus years and the markets kept rewarding them until they finally stopped.

Channel: David Rubenstein

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Length: 24min 6sec (1446 seconds)

Published: Wed Jul 27 2022