Bill Ackman is fighting back

Bill Ackman. Photo: Adam Jeffery/ CNBC/ NBCU Photo Bank via Getty Images.
  • Billionaire hedge-fund manager Bill Ackman lost his bid to get three of his own candidates on the board of ADP, the human-resources company.
  • The vote came after a three-month testy back-and-forth between the activist investor and ADP.
  • Ackman says that despite the loss, he and investors in his fund, Pershing Square, have actually won in the long-term.
  • “What our investors want us to do is make them money. We’ve made them money so far in our investment in ADP,” Ackman told Business Insider.
  • The stock price has improved since Pershing Square got involved with ADP, which has translated into about $US300 million in gains for his fund, he said. And he’ll continue to have influence on the stock.
  • ADP is essentially a win-win no matter what, Ackman said.
  • Ackman said his loss won’t change his strategy — and that activism hasn’t changed.

Bill Ackman’s Pershing Square lost its bid Tuesday to appoint three nominees to the board of Automatic Data Processing, the human-resources company. But according to Ackman, he also won.

Pershing Square in August disclosed an 8% stake in the company that handles many Americans’ paychecks. Tuesday’s vote capped a testy three months that included, among other things, insults slung from ADP’s CEO, Carlos Rodriguez, and rival hedge fund managers alike.

Ackman has contended that ADP, though it has performed well, could perform better, and deliver gains to his fund and other shareholders alike.

Overall, he’s optimistic about ADP, despite the proxy loss. ADP’s stock price has improved since Pershing Square made its presence known, to the tune of some $US300 million in gains, he said. And he’s confident ADP will act to make changes that his firm suggested, bringing on more gains. A win-win, so to speak.

Regardless, times have been tough for Pershing Square. An infamous long-term bet against Herbalife failed to produce gains, for instance, and assets at Pershing Square have dropped by $US1.6 billion in the past five months, Business Insider earlier reported. A proxy fund for the firm is down about 3.3% after fees for the year through October, meanwhile.

We caught up with Ackman after the vote Tuesday to get his take on his strategy on ADP and activism going forward.

Rachael Levy: I wanted to know what happens to your strategy on ADP going forward? How does this change your strategy, if at all?

Bill Ackman: It doesn’t change our strategy at all. The company has tried to characterise this as a major win for the company. It’s actually a major win for the shareholders.

So I got 31% support from shareholders out of the votes cast for my seat on the board, not including another 14% that were withheld from the guy I ran against. Because ISS, the proxy advisory firm, said, “Support Bill by withholding votes from Eric Fast.” So looked at correctly, I got 45% support from shareholders for my candidacy in the board. It’s not a win, but it’s a major minority, or just shy of majority vote, for the board.

Shareholders throughout the contest totally supported our view that this company should be operating much more efficiently and should address the problems it has in its enterprise segment.

In order to win this contest, the company had to come out publicly and make statements about improving their margins, improving their competitiveness, about accelerating growth on the back half of next year. We’re going to monitor the company very carefully. And now the ball is in management’s court. Will they deliver on the promises they made to shareholders? And if not, nine months from now we nominate another slate of directors.

Levy: What happens to the $US500 million you raised for this position?

Ackman: That capital is committed for four-and-a-half years. We’re a long term investor in the company and we have no plans to meaningfully change our position.

Levy: What did you learn from this experience? Would you have done anything differently?

Ackman: The thing that hurt us a lot is that ISS did not support all three of our candidates like Glass Lewis and Egan Jones did. They recommended a very unusual way for shareholders to support my election to the board, which was to withhold votes for Eric Fast. That’s ultimately what cost us the election.

Had I had known that was a possibility, I probably would have just run one candidate myself. It was a very simple decision — do they want to vote in favour? It almost becomes a referendum on our idea and there’s no need to go through the gymnastics of withholding for one director to support me on the board. That, I would say, is the biggest takeaway from this experience.

Levy: Let me make sure I understand this. So instead of proposing three board members, you’d have proposed only one?

Ackman: Well, had I known that ISS would, I was confident that we’d get support from the proxy advisor firms and we did. Except in the case of ISS, they said, support Bill for the board, but do it in a backhanded way. Do it by withholding support from one of management’s nominees. Those 14% of shareholders that voted that way, that withheld votes, were 14% of votes that I didn’t get. That’s what hurt our candidacy here.

But look, the unaffected price here before us, the stock was $US97 or $US98 a share. Today it’s $US112-plus. We own the economics of 33 million shares in the company. We’re up a lot of money, $US300 million or so in our investment in the company. That’s a good start.

Levy: What other options do you have now? You mentioned the proxy vote in nine months. Is there anything else you can do as an activist?

Ackman: The ball, as I said, is back in management’s court. They have committed to address the issues that we’ve identified. They already have plans underway to address these issues. So the question is are they going to address these issues or not? If they don’t deliver for shareholders, next year we’ll get the support we need to get on the board of the company. If they’re successful, and we hope they’re successful, the stock should go up a lot. So either way, we win.

Levy: And how are you going to approach activist positions going forward?

Ackman: The same way we always do. Again, we run very few proxy contests. The last proxy contest we ran was for board seats at Canadian Pacific. If we have to run another proxy contest, we will in the future.

One of the things that hurt us in this contest is the stock has done well. I don’t think anyone’s ever run a proxy contest with a stock as up as much as ADP before. And I think we’ve shown with the amount of minority support we got here that shareholders will support an activist in a case even where the stock has done well if there is a significant chance of improvement.

ADP stock has done well over the years, therefore it’s not a natural target for an activist. But over the last three months, we’ve explained why this is a target, because the company has huge potential for improvement.

What our investors want us to do is make them money. We’ve made them money so far in our investment in ADP.

Levy: Going forward, are there any new positions you can announce today?

Ackman: No.

Levy: More broadly, this is more of a philosophical question about the nature of activism, do you get the sense that activism has changed? Is it any different today in this raging bull market?

Ackman: I don’t know that it has. Look, I’ll point out the following which I think is something that isn’t well understood. Activism isn’t about winning proxy contests. It’s about making money for investors by getting companies that aren’t achieving their potential to achieve their potential.

Proxy contests are one of the tools in the activist tool kit to motivate a company. We used that tool here, we were forced to, it wasn’t our first choice. But we were forced to.

It has had the intended effect, OK? The ADP management team and board are going to be very motivated over the next nine months to deliver for shareholders. They know they have a major owner of the company who is watching everything they’re doing and they have a much more educated shareholder base.

So it’s a completely different company today and that’s what creates an interesting opportunity.

Levy: With stock market highs as they are, does that make it harder to win support from investors?

Ackman: No. I think the facts are specific to every company. We were always viewed as underdogs here because ADP stock has done well. The fact that we got 31% support of shareholders, not including the 14%, shareholders that voted against Eric Fast to support me, is a very powerful indication.

By the way, we also got the support of the second largest shareholder of the company.

Levy: Was that BlackRock or Vanguard?

Ackman: BlackRock.

Levy: More generally, back to this broader question, do you think activists wield the same power when the market is this high?

Ackman: If activists have good ideas, they will get one of two things, they will get support from shareholders or companies will be pushed to address the issues that an activist identifies.

Levy So essentially, yes, they should have the same power they had previously.

Ackman: Bear in mind, ADP is the second biggest company ever for an activist to take a position in.

Levy: Right. What is the significance of that?

Ackman: The bigger the company, the more difficult the target, typically.

Levy: One other thought I had on this, this was an interesting campaign in that ADP was fairly active in speaking out. The CEO went on major news networks often, as well. If companies that activists target have advisors talking them through activist defence, counter communications campaigns, that kind of thing, does that make it so the lower hanging fruit of investments have been picked off? Does that make your job harder, essentially?

Ackman: Look, if every company in America is run efficiently, that’s not good for activists. That’s good for Americans, but not for activists.

We do very few of these, maybe one a year, and they’re not usually proxy contests. I think we can find one or two interesting ideas a year. That’s all we need to make a living.

Levy: Could you speak about overall stock market valuations?

Ackman: I’m not an overall stock market prognosticator. I’m the wrong guy for that question.

Levy: Back to ADP specifically, why go after a company that has been doing well over a company that could use a bigger boost?

Ackman: The gap where they could be and where they are is extremely wide. Because the company is in a good industry, there are good tailwinds, so that we do well, even if we are to fail as an activist, we’d still make money as an investor.

Levy: Bill, thank you so much for taking the time. Is there anything else that you think we should add, or that I didn’t get to ask you that you think we should consider?

Ackman: The press is very focused on, they think of an election like a presidential election. This is very different. In a presidential election, the person who loses has no influence going forward. In an activist campaign, even if the shareholder activist loses if you will, I continue to be a shareholder of the company. The company has committed to make a significant number of changes and improvements on the business. And we get to monitor their progress and in nine months from now, we can put another slate of directors if we choose to.

Levy: So the fight continues on.

Ackman: It’s the end of the beginning, OK? We’re still in the very early innings but we’re off to a good start. The stock is up, call it almost 15%, from the unaffected price.

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