Ackman Says He Won't Compromise in Board Battle With ADPBy
ADP investors not concerned about past losses, activist says
Billionaire says he wouldn’t be content with just one seat
Bill Ackman said a settlement with Automatic Data Processing Inc. is “unlikely” as the activist investor defended his track record amid repeated attacks by the company’s management and board.
The billionaire investor said he wouldn’t be willing to compromise and take just one seat at the human resources outsourcer, given the fight that the current board has put up to resist his push for change. Ackman has put forward three nominees, including himself, for a shareholder vote next month.
“If you had a board of directors that was open to change, then one seat works,” Ackman said in an interview at Bloomberg’s New York headquarters Monday.
“The company has put a line in the sand,” he said. “They’ve said, ‘It’s status quo, we’re not changing anything.”’
Ackman has been meeting with ADP shareholders to put forward his thesis that while ADP is a good company, it’s losing ground to competitors by not performing at its full potential. Letting the proxy fight go all the way to a shareholder vote will give ADP’s investors a chance to speak, he said.
“If we end up on the board -- not by settlement but by the shareholders voting us on despite fierce opposition from management -- that puts us in a very powerful position,” Ackman said.
Ackman’s Pershing Square Capital Management is seeking to replace the three longest-tenured directors, including Chairman John Jones. Shareholders are scheduled to vote Nov. 7.
The Pershing Square candidates for the board, including himself, are a better alternative than the three directors who would be replaced, Ackman said. He questioned some ADP directors’ commitment to the company.
“The chairman of the board hasn’t bought a share of stock in the company. Not one,” Ackman said. “I have a personal investment that is vastly larger than the entire board, the CEO and the senior management of the business.”
“That’s a pretty straightforward decision for shareholders,” he said. “Are you better off with a major shareholder in the room?”
Jones, who has received ADP shares as part of his compensation, owned 43,923 of them as of August, according to data compiled by Bloomberg.
Glenn Hubbard, one of the directors Pershing Square is seeking to replace, sits on too many boards to be effective at ADP, Ackman said. Hubbard is on the boards of Metlife Inc. and BlackRock Closed-End Funds, according to data from Bloomberg. He doesn’t have CEO experience, or special knowledge of the sector or in technology, Ackman said.
Ackman said his candidates, Veronica Hagen and Paul Unruh, would bring welcomed refreshment to the board. Hagen was chief executive officer of Polymer Group Inc. for six years before her retirement, while Unruh, who also has executive experience, helped oversee similar changes at Symantec Corp. as a director that would be implemented at ADP, Ackman said.
A representative for ADP didn’t immediately respond to a request for comment Monday.
Roseland, New Jersey-based ADP, which handles payroll for 26 million workers in the U.S., has so far resisted Pershing Square at every step, saying Ackman’s slate lacks the necessary experience and would add little value. The company has nominated its existing 10 directors, including CEO Carlos Rodriguez, for re-election at its annual meeting.
Ackman defended his own investing track record, which has been the focus of ADP’s rebukes during the proxy campaign. The company has highlighted Pershing Square’s $4 billion loss on a bet on Valeant Pharmaceuticals International Inc. and its ongoing $1 billion short position in Herbalife Ltd. even as shares climb, as well as poor investments in J.C. Penney Co. and Target Corp.
The activist said those investments haven’t hurt his efforts to persuade ADP shareholders.
“They don’t even ask,” Ackman said. “Every person we’re meeting with has made bad investments. Our batting average has been very high. What they care about is whether there is an opportunity to run this company better."
Pershing Square has outperformed many of its rivals, he said. The fund has returned on average about 144 percent for its current and former activist investments, versus an average of 17 percent returned by the broader S&P over the same period, according to 13D Monitor, a research firm specializing in shareholder activism.
That exceeds the 62 percent returned on average by Nelson Peltz’s Trian Fund Management and 32 percent returned by Elliott Management Corp., the research shows. Activist investor Carl Icahn has returned about 22 percent on his investments.
Ackman said that while Pershing Square’s efforts have already put a lot of pressure on ADP, the investment firm doesn’t plan to take its foot off the gas even if it loses this proxy fight. Should ADP maintain the status quo on the board and not dramatically improve its operations in the coming 12 months, it will face another battle next year, he said.
Ackman’s criticism of the company has been focused on its inefficiencies and lack of innovation as a result of its “buy not build” strategy for expanding its offerings, a lack of integration of those acquisitions, and what he claimed was a bloated and insular corporate structure. Ackman has said he believed changes at ADP could drive the share price to as much as $255, more than double its current level, by June 2021. He contends the company could improve its margins by 1,200 basis points, and also that it will probably need a new CEO.
The bulk of the opportunity lies in improving the margins of its employer services division, which currently has margins of about 19 percent compared with competitors such as Paychex Inc., whose margins are more than double that, according to Ackman. He repeated his view that ADP could improve its national account business by acquiring human resources provider Ceridian HCM from Thomas H. Lee Partners.
Ackman said the company needs to change its incentive structure to reward executives for exceeding targets rather than merely meeting them. The company also needs to reduce the layers of management to five from 11 so it can compete more effectively, he said.
“Precisely how much margin comes from consolidating the real estate footprint or reducing the management footprint or automating implementation is difficult for us to quantify from outside of the company,” he said. “But you can very easily benchmark against competitors and say, ‘The number’s just way wrong.”’