William Ackman and Automatic Data Processing (ADP)

Pershing Square, the hedge fund founded by well-known investor William Ackman, established a position in business services company ADP earlier this year.  Arguing that ADP was poorly managed–a problem Ackman said he could fix–he nominated himself and two associates for election to the board of directors of the firm.

Results of voting were released last week.  None of the three Pershing Square nominees were elected to the ADP board, despite Ackman being recommended by the three major shareholder advisory firms (the other Pershing Square nominees were recommended by two of the three).

Ackman has proclaimed this result as a victory for him, in that his nominees received about a quarter of the votes cast.

I’m not convinced.  Here’s why:

In early days of my career, institutional investors generally didn’t pay much attention to voting on corporate proposals. Generally, if they voted, they cast their ballots with management.  In the early 1990s, though, the SEC criticized the industry for this attitude and strongly reminded investment managers of their fiduciary obligation to study corporate issues carefully and vote their shares in the best interest of their customers.

 

I witnessed the early days of dealing with this new requirement.  Time had to be found for a meeting of all the portfolio managers who held a given stock. Consensus was very often hard to come by.   On the other hand, having having a money manager cast votes on both sides of an issue was at best a dubious proposition.  Lots of lawyers, both inside and outside counsel–none of whom had any clue about the relevant investment issues–had to get involved, as well.  A real mess.

 

Proxy solicitation firms saw a chance to radically transform their business.  They began to provide third-party voting advice, which was formulated by newly-hired teams of specialists in investment law.  These services were an instant hit.  Portfolio managers could get back to the work they knew best; investment management firms could rest easy, knowing that their taking advice from an objective third party would be a good  defense against any complaint they were not taking their fiduciary obligations seriously.

For at least the past twenty years, the policy of money management companies has been to follow the advice of firms like ISS, Glass Lewis and Egan-Jones, unless there are very strong reasons to do otherwise.  All three recommended that institutions vote to elect Ackman to the board.  Yet, despite the fact that institutions own 83% of ADP’s shares (according to Google Finance) neither Ackman nor the rest of his slate were elected.

This is not even a moral victory, in my eyes.  Just the opposite–it’s a surprisingly weak showing.  Of course,  the fact that the shares of JC Penney (JCP) are now trading below $3, can’t have helped.  JCP was another high-profile turnaround target of Pershing Square’s at $25 or so a few years ago,

Pershing Square has sold its entire stake in J C Penney (JCP) overnight

Pershing no longer owns any JCP

Bill Ackman has followed up his departure from the board of JCP by describing his investment in that company as a “failure” and striking a deal with Citigroup (C) to sell his entire 38.08 million share holding (about 18% of the outstanding stock).

Ackman’s investment group will receive $12.90 a share, less fees.  My guess is that they’ll net about $12.25.  We’ll know for sure when the final prospectus comes out.

Contrary to earlier press reports, which said C was going to take this massive position onto its own trading books and gradually dribble the stock out to the market (which would have entailed a huge risk) this is a straightforward underwriting.  The only twist is that there’s no big underwriting/sales group.  C is the sole underwriter.

The underwriting process goes like this:

–Pershing Square asks C to lead an offering to sell its JCP stock

–C assembles the underwriting/sales group, in this case itself

–C calls clients to get indications of interest and to try out possible prices.

–C sets a price (in this case $12.90 a share), distributes a preliminary prospectus, gets firm commitments from clients and buys the stock from Pershing Square.  This last apparently occurred yesterday.

Technically speaking, client commitments aren’t legally binding.  Unless you’re very big and powerful, however, there’s a fat chance you’ll ever get to see a good IPO allocation again if you go back on your word

–C sells the stock to clients.  This is presumably happening  this morning.

As part of the deal, C gives buyers a final prospectus, which– legally speaking, is the only official offering document.  The client has a brief time to review it and return the stock if he doesn’t like what he reads.  In my experience, however, clients seldom read the final prospectus.  I don’t know anyone who’s ever returned stock.

what bothers me

I’m usually a solidly free markets guy.  Laissez faire and all that.  But Pershing-JCP is a case of corporate bungling on an epic scale.

Ackman enters in cape and tights to “save” a company that’s not a world beater but nevertheless is muddling along.  He installs similarly-clad Ron Johnson as CEO.  Johnson promptly alienates customers, loses a third of company sales and burns up a ton of corporate cash.  All the while he’s defended by Ackman.  Both exit the now-smoking wreckage with a few tepid words of apology.

Yes, both lost money and their reputations are tarnished a bit   …but that doesn’t seem to me to be enough.  On the other hand, I’m not sure what other penalties there should be.  Disbarment?

Maybe it’s just the speed at which disaster struck that disturbs me. As I think about it, I can come up with many examples of the same incompetence  in slower-moving corporate train wrecks.  Think:  C. Michael Armstrong at ATT, and then Citigroup (as a board member).  How about Carly Fiorina…or just about any CEO…at Hewlett-Packard?

one other note:  It’s interesting that C was able to find buyers for 18% of the stock at $12.90.  A floor on the stock price?