Deals

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

Well, this is going well.

Activist investor Bill Ackman finally unveiled his plan to boost the stock price of human-resources services provider Automatic Data Processing Inc. on Thursday. This comes nearly a full two weeks after ADP publicized his wish for board seats and a potential replacement of the CEO. I can see now why he kept everyone waiting for so long: the presentation spanned a whopping 167 slides and surpassed three hours. After all that research, spreadsheet work and sheer breath, the effect was … well, see for yourself:

Um, No
Investors were unimpressed with Ackman's ADP pitch. As of about noon in New York, the shares had dipped down to the lowest level on an intraday basis since his stake was first reported in July.
Source: Bloomberg

The presentation was heavy on things that ADP is doing wrong and short on new, actionable fixes. Ackman's Pershing Square Capital Management team argued that ADP has invested inefficiently in new products, leaving it with subpar, bloated technology.

ADP tries to make up for this, Pershing says, with a large team of service professionals who really act in more of a support capacity as opposed to adding value for customers. As such, ADP is losing market share, particularly with larger corporations. And analysts are under-appreciating the margin and revenue deficiencies because management hides it well through complex accounting and a lack of disclosure, Ackman said.

At times, it came across as a presentation that was originally meant to substantiate a bet against the company, but reworked to make it a bet on the company. It sure sounded like a short thesis, particularly with the allegations of deliberately deceptive accounting. In fact, Robert Chapman of Chapman Capital told Bloomberg News that he's now betting against the stock, calling ADP overhyped and overpriced. 

Overhyped?
ADP is already trading at an elevated valuation. Its price-earnings multiple is a premium to its five-year average and exceeds that of smaller rival Paychex.
Source: Bloomberg

Ackman was already on the defensive about his stake in ADP, which has drawn a skeptical eye from Wall Street because the company commanded a high valuation before he showed up and hardly screamed for activist intervention. Former board member Leon Cooperman called the investment "foolish," while the ADP CEO called Ackman a "spoiled brat" for asking for an extension to nominate board directors. This presentation isn't going to do much to win over those doubters.

Some of Ackman's points do ring true. ADP hasn't been as strong as it should be on software (Ackman even cited comments Cooperman made earlier this month to that effect). The company should be working to get more revenue out of each of its employees and boost margins. It could stand to better integrate its businesses and real estate. Some of this ADP is already addressing itself. Could it move more aggressively? Sure.

But it's a bit rich to hear a guy who advocated vociferously for Valeant Pharmaceuticals International Inc. now rail against management for missing the bigger picture by focusing too much on meeting short-term numbers and buying businesses versus building them. It's just not clear what new ideas Ackman brings to the board that are going to meaningfully boost a stock price already expecting some operational improvement. In fact, some of his points on accounting games would seem to point to a stock that's currently overvalued.

Ackman seems to be playing a longer game here, with an eye toward more than doubling the stock price in four years. But in that, he's asking his fellow investors for a kind of patience that activist shareholders so rarely grant companies promising turnarounds. And they aren't impressed. 

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

  1. Ackman has since said that he's willing to work with the existing CEO if he shares his view of the opportunity to create shareholder value.

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

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net