Illustration by Nigel Buchanan
By Geoff Colvin
November 26, 2018

On Oct. 1, when General Electric announced it had fired John Flannery, its CEO of just 14 months, one of the few people not at all shocked by the news was Nelson Peltz, the legendary activist investor. Flannery’s abrupt dismissal surprised even Wall Street analysts who obsessively follow the tarnished conglomerate. Yet Peltz wasn’t caught off guard, because his partner at the Trian hedge fund, Edward Garden, is on the GE board of directors that did the deed. Trian owns 71 million shares of GE stock, qualifying GE as Peltz’s most disastrous investment in a long, successful career. He’s down over $1 billion, about 50%, since buying in three years ago, with the stock’s latest drop following word of a federal criminal investigation into recently disclosed liabilities. With the brutally swift cashiering of Flannery, Peltz now understood change was afoot.

More than most, Peltz is comfortable with dramatic change. No other activist, a class of investors not content merely to watch from the sidelines, has prompted more of it. Among many activist forays, he instigated the transformation of DuPont into three independent companies after first combining with Dow Chemical. He forced the separation of Kraft into Kraft Foods Group and Mondelez International. He tried and failed to break up PepsiCo. He thinks big.

He has never thought bigger than he did with GE and with the other company at the top of his to-do list, Procter & Gamble. P&G is no disaster—its shares are up slightly since Peltz invested—and it’s decidedly more promising than GE. In November, the company announced a watered-down version of the reorganization plan he had been pushing. But the company is nowhere near the success Peltz wants it to be, a year after he battled P&G in the most expensive proxy fight in U.S. history and gained a board seat in March. P&G stock is a laggard, and Peltz’s stake, recently worth $3.5 billion, is by far the biggest investment in $10 billion Trian. So Peltz needs it to perform much better if it’s to help rescue him from the GE debacle. (Because Peltz is on the P&G board, and Garden, his son-in-law, is on the GE board, they declined interview requests for this article.)

Together, GE and P&G have mauled Trian’s previously sterling record: Over the past five years, Trian’s rate of return has averaged an outstanding 11.9% annually; over the past three years, a mediocre 6.5% annually; in 2018 through October, a dismal –1% or so, according to a Trian investor. Much of Peltz’s personal wealth and his reputation as a high-performing activist are tied up in those two companies.

How Peltz fares with GE and P&G is important because the two famed companies share many traits besides being Peltz’s biggest problems. They’re American institutions, storied worldwide as corporate aristocrats with bloodlines stretching back more than a century. Each lives according to a unique, titanium-strength corporate culture that developed back when they were supremely dominant. Neither company has retained its stature, though. With board seats at both, Trian is pressing the boundaries of what can be accomplished at such organizations. In addition to bringing the activist’s usual tools—breakups, cost cutting, borrowing—the firm is willing to delve more deeply into operations than any other activist and sometimes spends years helping management fix a business. As disruption threatens more big, old incumbents, Trian’s success or failure will help define how much an activist, or any outsider, can hope to achieve in that hardest of managerial challenges, transforming a company that once ruled the world.

HAPPIER TIMES: From left: Trian’s Edward Garden, Nelson Peltz, and Peter May leave a 2006 meeting, before the firm plunged into problematic investments in GE and P&G.
Lisa Kyle—Bloomberg via Getty Images

Peltz isn’t a usual activist, Trian isn’t a usual hedge fund, and GE isn’t a usual investment for it. At age 76, Peltz traces his activist roots to the mid-’80s heyday of Michael Milken and the band of corporate raiders he financed. Besides Peltz, they included Carl Icahn, Saul Steinberg, T. Boone Pickens, and others. Unlike many back then, Peltz wasn’t interested in greenmail, the strategy of buying a stake, threatening management with a takeover that would cost them their jobs, and offering to go away if the company bought back the greenmailer’s stock at a higher price. Instead, he saw a chance to make even more.

He felt he could do it because, unlike virtually all the other 1980s raiders and today’s activists, he had run businesses far from Wall Street. He and his brother built the family’s food distribution business into an institutional frozen food company called Flagstaff; to this day, Trian likes food companies and has invested in many—Wendy’s, Kraft, Heinz, PepsiCo, and more. Flagstaff went bankrupt when Peltz was 40, but he apparently learned from the experience. He and Peter May, an accountant who had been Flagstaff’s chief financial officer, bought Triangle Industries, a vending machine and wire company that they built into a Fortune 100 industrial conglomerate, which they sold in 1988. He and May have been buying, fixing, and selling companies ever since. In 2005, they formed Trian with a third partner, Garden, a former Credit Suisse First Boston investment banker. Institutional investors like the California State Teachers’ Retirement System, which has backed Peltz in his proxy fights at DuPont and P&G, account for about 75% of Trian’s assets, the firm says.

“Fix companies and turn businesses around—that’s what we do,” Garden, 57, told an investment conference in March. “We look for fundamentally great companies where management has gone off track operationally and where we think we understand what it takes to get the business back on track.” If that sounds to you more like private equity, Trian agrees. “We think of ourselves as a new asset class,” he said. “ ‘Liquid private equity’ or ‘hybrid private equity.’ ” The objective is to earn PE-scale returns without having to buy a whole company or a significant stake, as PE firms typically do; Trian owns only 1.5% of P&G and 0.8% of GE. By improving operations and holding positions for years, even without leverage, Trian hopes to generate higher returns and earn bigger performance fees than it could through trading alone.

In the spring of 2015, Trian was successfully exiting four investments—Danone, Family Dollar, Ingersoll-Rand, and Lazard—and was ready to invest elsewhere. General Electric certainly met the spec of a great company that had gone off track, and as it happened, GE chief Jeff Immelt had invited Peltz to buy in. Two years earlier, Immelt had even arranged for Peltz to address his top managers on the subject of cost cutting. Such an embrace was almost unheard of; Trian’s targets usually try to repel the invader, at least initially. Giant, old industrial companies weren’t Peltz’s specialty, but Immelt, crucially, had promised Wall Street that GE would earn $2 a share by 2018, up from 17¢ per share from continuing operations in 2015. Trian concluded GE could do even better, $2.20 or more; the $26 shares ought to be worth $40 to $45 by the end of 2017. Peltz bought $2.3 billion of GE stock and told Immelt that Trian would hold him accountable for keeping the $2-a-share promise.

That fall, Trian published a “white paper” on GE, an 81-page PowerPoint deck powerfully endorsing GE’s strategy and its stock. Yes, the company needed to cut costs and excise management layers, and it could borrow more. But this was fundamentally a case of Immelt making “a massive change in its business model”—exiting most of GE Capital and targeting more revenue from services rather than from sales—that was “under-appreciated in the market,” Trian argued. The stock rose, and Peltz sold some, taking almost $400 million off the table, which in retrospect was a wise move. The stock continued drifting up, reaching heights it hadn’t achieved since before the financial crisis and touching $32.38 in December 2016.

Nagging doubts first appeared in 2016’s fourth quarter. GE’s transformation was expensive; the company was paying out more cash than it was taking in, and its pension fund was underfunded by $31 billion. Dividend payments alone, at $9.3 billion in 2015, consumed more than GE’s entire free cash flow. In addition, GE’s biggest business, which makes gigantic turbines for electric utilities, wasn’t booking as many orders as anticipated. Still, the shortfall was arguably reversible, and investors didn’t seem worried.

Had Peltz been worried about GE, it seems unlikely he would have picked that moment to make another massive bet on a troubled titan. Just weeks earlier, with his GE stake appreciating, Peltz bought his first tranche of Procter & Gamble stock. By early 2017, it was Trian’s new largest investment, worth $3.3 billion. P&G no longer marketed food, Peltz’s favorite business, but this was still his ideal target, a great company that had grown far too complex and needed shaking up. Dozens of its most famous brands—including Gillette razors, Crest toothpaste, and Pantene shampoo—were losing market share; all five of its product categories had lost significant ground to competitors. Other investors were glad to see Peltz; the stock, which had gone nowhere for years while the market surged, jumped on Peltz’s entry.

Wall Street gladly greeted Peltz’s arrival, but P&G’s leaders did not. The company issued the obligatory statement about appreciating all its shareholders, but managers loathed the prospect of an outsider telling them how to do things. Peltz’s meetings with CEO David Taylor and the board frustrated both sides. When word leaked in June 2017 that Peltz had nominated himself for a board seat, investors cheered, and the stock jumped again. Ironically, P&G leaders would later cite the stock’s improved performance as evidence that their strategy was working fine without Peltz’s help.

P&G rejected Peltz’s request, so in July he announced a proxy fight. The ordeal proved expensive, nasty, and long. Taylor warned that by distracting management, Peltz could “derail the transformation we’re leading.” Peltz repeatedly attacked Taylor by name and enlisted former P&G CFO Clayton Daley to campaign against his former employer. The two sides spent lavishly, as much as $100 million, on the battle, and in the end, P&G won a two-month shareholder vote by the nearly invisible margin of 50.01% to 49.99%. The directors realized the victory was too narrow to deny Peltz a seat, and he joined the board this past March.

It’s hard to believe that Peltz and Garden could have focused on anything besides the world’s all-time biggest proxy fight, but they had to. Just as relations with P&G were deteriorating in mid-2017, GE was melting down.

Investors were fast losing faith, and it was becoming apparent that the $2-a-share earnings promise for 2018 wasn’t achievable. (Today Wall Street expects GE earnings of 68¢ per share.) GE investors and analysts recall the moment they realized Immelt was through. It was the longtime CEO’s presentation at an annual May ritual in Florida where CEOs of big companies that make electrical products speak to the financial community. “I’ve never seen anything like it,” says one. “He was a broken man. You couldn’t stand to look him in the eye. He got eaten alive by basic, simple questions.” Just 19 days later, Immelt surprised everyone by announcing his retirement. The stock responded with its best day in 20 months.

Courtesy of P&G

With Immelt’s commitment trashed and their plan for GE now a shambles, Garden and Peltz stopped asking about a board seat and started demanding one. At that same time, Peltz happened to be demonstrating his ferociousness in the proxy fight with P&G. GE added Garden to its board in October, no proxy fight needed.

From then until now, GE’s news has gone from bad to worse. Its most dramatic response has been the radical restructuring of the board, a process that began soon after Garden joined. Half the 18 directors left—an unprecedented putsch—and were replaced by three new directors, one of whom was Larry Culp. Speculation followed instantly: Was he the CEO in waiting? And if so, was Trian behind it? The firm won’t comment, but it issued a fact sheet about itself last May that observed that at GE, “three new directors joined the board including Larry Culp, former CEO of Danaher,” while omitting the names of the other two. Insiders say Culp disavowed any desire to be CEO—a sure sign the possibility existed.

From Trian’s perspective, the GE board revamp was significant progress. More followed when Peltz took his seat on P&G’s board. The vitriol of the proxy fight had evaporated. “We respect Nelson Peltz … and look forward to his contributions as a member of P&G’s board,” Taylor said in a statement. Peltz said he was “looking forward to working closely” with Taylor. The first hint of Peltz-led change arrived in a July securities filing disclosing that P&G had revised its incentive pay plan for top managers, tying pay more closely to individual performance and less to corporate results. That was classic Peltz, followed in November by a far more significant change reorganizing the company into six units headed by chiefs with more power and clearer incentives. Investors cheered: P&G’s stock rose 2.2% over three days when the S&P 500 dropped 3%. CEO Taylor called it “the most significant organization change we’ve made in the last 20 years.”

Michael Nagle—Bloomberg via Getty Images

So here’s the state of Peltz’s duo of big blue-chip bets. P&G has been a hell of a struggle and will likely remain one. The new reorganization is a helpful structural change, but P&G’s problems go deeper. A long-standing strategy based on building mass-market national and international brands is at odds with today’s consumers who increasingly favor smaller, niche, and local brands. The rise of Harry’s and Dollar Shave Club as successful challengers to Gillette, for example, caught P&G flat-footed—a new experience for the longtime alpha-dog company. More broadly, P&G’s culture could sabotage any significant change. At age 181, it may be too old to adjust.

Peltz faces another unsatisfying scenario at P&G. He could be the catalyst for slow improvement, avoiding disaster but returning puny gains over many years. Nonetheless, Peltz has been willing to spend years fixing other companies (much smaller than P&G) that eventually turned around and came back stronger; Wendy’s, a Trian triumph over the past decade, is a good example. At least there’s hope.

Any hope for GE is a shriveled remnant of what Peltz envisioned in 2015. His investment was a huge gamble on a 120-year-old industrial company adapting to a new world of digital technology and related services. It was the right idea, but no one at the top of GE or at Trian could evaluate GE’s ability to execute it, which turned out to be poor. In addition, GE and Trian were blindsided by a vertiginous plunge in global demand for electricity-generating turbines. Trian could be forgiven for missing it; GE couldn’t. And then all GE investors got crushed by revelations of mammoth liabilities in the company’s turbine business and long-term-care insurance business. In retrospect, Peltz relied way, way too much on Immelt’s assurances. Putting that much trust in a CEO who had underperformed up to then was a mistake.

Peltz’s odyssey with GE and P&G outlines the limits of activism. As investors with non-controlling stakes, activists can’t run a company day-to-day, which means they’re always a couple of steps removed from solving the deep cultural problems afflicting many companies in an age of disruption. Influencing the choice of the CEO is about the best they can hope for. But the real transformation is in that person’s hands, not in the activists’. That’s why so many of their proposals are structural, mostly for reorganizing or breaking up the company. The logic is that newly liberated business will benefit from clearer incentives, less complexity, and more options, and that strategy has often worked. Most of the companies that Trian has broken up have proved more valuable in pieces. But it isn’t a strategy that preserves great old institutions. The hard reality may be that at a certain point, they aren’t worth preserving any longer.

Peltz’s wager on the aging aristocracy of American business continues to wallop Trian’s performance. The great question now is whether this is a turning point for him after years of standout success or just a low point in a business full of ups and downs. As an answer plays out, the sobering truth is that he and Ed Garden, who fix companies for a living, have staked a great deal on working wonders at two of the most fix-resistant companies in the world.

A version of this article appears in the December 1, 2018 issue of Fortune, as part of the “2019 Investor’s Guide.

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