Commentary: Lundgren schools Ackman in a New York minute

Lessons from flyover terrority

COMMENTARY - Macy's Inc. CEO Terry Lundgren has only been a Procter & Gamble Co. board member for a few months. But few would argue that he's not already earned the roughly $270,000 in restricted stock and cash awards that P&G pays its directors.

In the last few weeks, Lundgren has played a pivotal role in exposing flaws in Bill Ackman's business acumen, flaws that wiped out $6 billion in shareholder wealth in one year at J.C. Penney Co.

You remember Bill Ackman, the New York hedge fund manager who said P&G CEO Bob McDonald wasn't fit for his job. Ackman bought a 1 percent stake and delivered a 75-page list of grievances to the company. Of course, he could do the job better, right? I mean, we're all just a bunch of dim bulbs here in flyover country, lacking the wealth and talent that makes the glittering coasts the envy of our planet.

But sometimes in Cincinnati, one of our own will defy the odds and rise to greatness.

It happened in 1975, when Tony Perez launched Bill Lee's blooper pitch over the Green Monster at Fenway, sparking a comeback that made the Big Red Machine a World Series champion.

It happened in the 1980s, when Carl Lindner Jr. outdueled the nation's biggest takeover artists, shrewdly buying debt to gain control of companies like Chiquita and General Cable and moving them to Cincinnati.

And it happened in New York's Supreme Court two weeks ago, when Lundgren testified in Macy's lawsuit against J.C. Penney and Martha Stewart Living Omnimedia. Lundgren told the court Martha Stewart breached her exclusive contract with Macy's when she signed a deal to provide home goods to his Plano, Texas based rival. He also said he hung up on Stewart when she called to tell him about it, ending their friendship.

"I was sick to my stomach," Lundgren said. "I can't remember hanging up on anyone in my life."

Lundgren's role as an innocent victim was reinforced by Macy's lawyers, who grilled Penney CEO Ron Johnson about emails in which he talked about finding a way to "break" Stewart's agreement with Macy's.

Interestingly, one of those emails went to Steven Roth, a J.C. Penney director whose Vornado Realty Trust sold half of its stake in the company – more than 10 million shares – this week.

The Martha Stewart deal was important to Penney's retail strategy of converting its stores to a cluster of boutiques, or "shops within a shop," that would offer unique products and differentiate the retailer from other department stores. But Penney's customers have so far shunned the strategy, which also included an end to discounts and sales. When Penney sales started diving last fall, Ackman went on CNBC to defend the strategy and Johnson, a former Apple executive who Ackman recruited.

The courtroom drama continued this week, with New York Supreme Court Justice Jeffrey Oing telling all parties they should settle out of court and Martha Stewart testifying that Macy's hadn't grown her business the way they said it would.

But her pleas seemed to fall on deaf ears. On NBC's Today show, Matt Lauer continued the story line of Lundgren as victim by asking Stewart if she really thought her deal with J.C. Penney would be good for Macy's.

In the meantime, Penney's stock took another nose dive this week, as Vornado Realty unloaded shares and two analysts downgraded the stock. J.C. Penney has lost more than 60 percent of its value since Johnson – and Ackman – launched their boutique strategy a year ago.

Which brings us back to Lundgren. No one knows how Justice Oing will decide this contract dispute. But in the court of public opinion, the verdict is in. This InvestorPlace column, for example, describes Johnson as "conniving," Ackman as a fool and Lundgren as "the good guy."

All of which makes me wish I could be a fly on the wall for the next P&G board meeting, where Lundgren is likely to be welcomed as a conquering hero. Perhaps fellow board members will present a gift; say, a bottle of P&G's own Pepto-Bismol brand to settle that upset stomach.

"It's an interesting fight to watch," said Matt McCormick, a portfolio manager at Bahl & Gaynor Investment Counsel downtown. "No matter how rich you are, or how smart, egos can get you into trouble. It just proves people are not perfect. They're fallible."

McCormick has no stake in Macy's or J.C. Penney, but many of Bahl & Gaynor's clients are long-time P&G shareholders. Although he believes Ackman's intervention helped P&G, he doubts whether anyone in Cincinnati will shed a tear for the hedge fund manager who now finds himself in a J.C. Penney pickle.

 "We do things a different way here," McCormick said. "We do deals by a handshake and your word means something. There's a culture clash here. It's part of the reason people like to root against the Yankees. I agree with the judge that they'd have been better off working it out for themselves instead of going to trial and having your dirty laundry exposed.

"This trial,'' he added, "is something that's unnecessary, expensive and delightful to watch."



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