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Bill Ackman Strikes Again: P&G’s McDonald Out, Lafley In

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Four years ago, Bob McDonald declared himself “honored” to be succeeded by A.G. Lafley as chief executive of Procter & Gamble Co. (PG). McDonald called Lafley “one of the greatest CEOs in P&G history.”

In the same December 2009 press release, Lafley said, “I am retiring with confidence in Bob McDonald and his team. This is the right time to complete our management transition.”

Or, maybe it wasn’t. McDonald no doubt felt less honored to be succeeded this week by Lafley, who was asked by the board of the Cincinnati-based consumer-goods empire to resume the CEO role after McDonald’s abrupt decision to retire.

Under McDonald, P&G’s profit margins, market share and stock price lagged relative to peers such as Unilever PLC (UL), Colgate-Palmolive Co. (CL) and Clorox Inc. (CLX).

Critics in the investment community have blamed McDonald for allowing lower-priced competitors to win market share from such gilded P&G brands as Tide detergent and Pampers diapers, and for being slow to capitalize on opportunities in emerging markets.

He launched a $10 billion cost-cutting restructuring plan early last year, but it has not been enough to placate restive investors such as Pershing Square Capital’s Bill Ackman. The activist hedge-fund manager bought a 1% stake in the company and publicly called out McDonald for P&G’s costly corporate bureaucracy and his own heavy time commitments to numerous outside boards.

Wall Street likes the switch on first look, with the stock spurting 4% higher in early trading Friday. Ackman, in his presentation on P&G at this month’s Ira Sohn investment conference, made the case that P&G could earn $6 per share by 2016 versus the current $4 run rate, with relatively simple cost-reduction measures.

Lafley is the second former CEO of a well-known consumer company stalked by Ackman to return to replace a controversial successor. Mike Ullman came back to J.C. Penney Co. (JCP) to take over for former Apple Inc. (AAPL) retail mastermind Ron Johnson.

Related: J.C. Penney Remains a Disaster, Short the Stock: Howard Davidowitz

The difference there, of course, is that Johnson was Ackman’s choice, but was unable to turn around the retailer and alienated its traditional customers with more youthful fashions and an “everyday low price” strategy.

On some level, McDonald may have suffered from the common fate of executives who succeed a revered CEO, such as Jeffrey Immelt taking over for Jack Welch at General Electric Co. (GE). Lafley was one of the most lauded corporate chiefs of the last two decades, so the board’s request for his services again is no surprise.

Yet this move is not a long-term solution for P&G, which is known among investors almost as much for its management discipline, stability and insular corporate culture as for its household brands. A page on P&G’s company Web site touts its “12 CEOs in 12 Decades.”

Lafley will soon be 66-years-old, which means that a search for a 13th CEO has already essentially begun. While Ackman did not make the case in his May 8 talk that McDonald should immediately go, he did claim, “The next two to three quarters are critical to demonstrate current leadership has the abilities to turn the company around.”

And if not, he suggested, there are some “very interesting” candidates outside the company for P&G to consider. Perhaps that process is already underway.

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