Deals

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

Bill Ackman's latest target has a point: Why should we take advice from this guy?  

Ackman's Pershing Square Capital Management has built a stake in payroll and human-resource services provider Automatic Data Processing Inc. and would now like to fire the CEO and get five seats on the $50 billion company's 10-member board. But Ackman, according to ADP, wasn't prepared to get his slate together in time by the Aug. 10 nomination deadline and wanted a 30- to 45-day extension. ADP said it wasn't going to change the deadline, which has been public for nearly a year. Oh, and by the way, our company is performing a lot better than yours.

Not a Problem Child
Before the news of Ackman's stake, ADP was outperforming the S&P 500 year-to-date. Its gains for all of 2016 also surpassed the index.
Source: Bloomberg

Burn. But ADP is right.

First, it's a bit ridiculous to ask for an extension of the nomination deadline. Managing the important dates for a proxy fight is the first lesson of activist school, and you can't exactly rail against a company for surprising you with a deadline that's been out there for months. Second, after losing $4 billion on a wrongheaded bet on Valeant Pharmaceuticals International Inc. and then plunging another $1 billion or so into what looks to be another wrongheaded bet on Chipotle Mexican Grill Inc., Ackman's fund is not exactly in a position to be lecturing about shareholder returns.

ADP says its holders have enjoyed a total return of 202 percent since Carlos Rodriguez became CEO, including gains related to the spinoff of CDK Global. It compares that with what it calculates to be a 29 percent return for Pershing Square over a similar period.

The data aren't exactly apples to apples; the return for Pershing Square is calculated from Jan. 1, 2012 to Dec. 31, 2016, while ADP's return is calculated from November 2011 to intraday July 27, when reports of Ackman's interest first emerged. Doubtless, Ackman has his own view. But nevertheless, just doing rough calculations on our own, the gist remains the same. ADP is generally doing fine. Ackman's Pershing Square, less so, particularly of late. As of July 31, the fund was up 0.9 percent year-to-date, compared with a nearly 12 percent total return for the S&P 500.

If It Ain't Broke ...
For a relatively staid outsource-services company, ADP's revenue growth is pretty strong
Source: Bloomberg
NOTE: The drop in 2014 corresponds with ADP's spinoff of CDK Global

Ackman's case is further undermined by the fact that it's not really clear what he can do to improve ADP. It's worth noting that he already had a stake in ADP from 2009 to 2011, using that holding to reportedly call for a rethinking of the company's capital structure and a spinoff of non-core assets. Well, ADP already did both of those things through the CDK Global spinoff in 2014. At this point, there are few obvious breakup or M&A opportunities. Meanwhile, there's not a ton of room for margin expansion or further improvements to organic growth, as Morgan Stanley analyst Danyal Hussain notes. Ackman could push for buybacks, I suppose, but why do you need five board seats and a new CEO for that?

Ackman may yet come out with a more concrete reason for such an aggressive push at ADP. But this situation is a bit reminiscent of Nelson Peltz's campaign at Procter & Gamble Co., where the main argument seems to be that the company will be able to do a better job of making the improvements it already planned with an activist investor on the board. That pitch is falling a bit flat for Peltz. And he arguably has more credibility than Ackman does at this point.  

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net