Bill Ackman - Date/Photographer unknown.

20 January 2012

Bill Ackman Track Record is Why CP Rail Should Tell Him to Hit the Road

Toronto Ontario - Among the telling things about Bill Ackman is that he is acutely sensitive to slights.
 
Ackman, 45, is the "activist investor" whose New York hedge fund, Pershing Square Capital Management LLC, is pulling the tail of 131-year-old Canadian Pacific Railway Ltd.
 
If CP doesn't submit to Ackman's will, dumping its CEO in favour of a retired CEO of CP's archrival, Canadian National Railway Co., Ackman will use his recently acquired 14.2 percent stake in Sir John A's 19th-century mega project to wage a proxy war, a "nuclear winter" is Ackman's friendly term, and effectively take control of CP with the installation of his own slate of directors.
 
Not so long ago, Ackman tried a variation on this stunt with Ceridian Corp., the giant Minneapolis supplier of payroll and other human-resources services. For her trouble in granting Ackman an audience, CEO Kathryn Marinello was rewarded by Ackman describing her appearance to reporters as that of a refugee from a karaoke bar.
 
The visiting New Yorker took what he regarded as inexpensive garb and jewellery Marinello wore to their meeting as a provocative dismissal of himself. Neither was he sold on the merits of Marinello's growth strategy. So Ackman launched a proxy war. Its outcome was inconclusive, as Ceridian elected to sell itself to a private equity firm and has since thrived.
 
Pershing Square doubled the value of its Ceridian stake. But as Ackman told the Minneapolis Star-Tribune at the time, "I've got three kids, and a proxy fight really sucks up all your time. Ceridian was Pershing's first proxy contest and hopefully our last."
 
That's obviously not an avowal one could take to the bank, given that Ackman has since waged another proxy fight and is now threatening a third.
 
A courtly CP chairman, John Cleghorn, 70, also went to the trouble of meeting the New York interloper. But alas, Cleghorn earlier this month somehow neglected to promptly return a phone call from an impatient Ackman.
 
The next day, Cleghorn was in receipt of the now-notorious "nuclear winter" e-mail, whose finesse only Duddy Kravitz could admire. It threatens a proxy war culminating at CP's next annual shareholders meeting, in May. That would be preceded by Ackman holding forth in "the largest public hall available in Toronto" on the failures of CP's directors, not only on CP's board, but in their previous careers.
 
Here are a few reasons CP might be well-advised to call Ackman's bluff:
 
·  Ackman's public ridicule of CP's directors would backfire. Cleghorn steered Royal Bank of Canada to record profits as its CEO. CP director Roger Phillips turned Ipsco Inc. into one of North America's few consistently profitable steel makers. Richard George greatly increased the size and profitability of Suncor Energy Inc.'s Athabasca tar-sands operation. And in acquiring Petro-Canada, he created the nation's only Canadian-owned integrated-oil powerhouse. And so on. CP's directors can easily withstand public scrutiny.
 
·  Ackman, by contrast, has a decidedly mixed record. On the success side of the Ackman ledger, he forced an under performing Wendy's International Inc. to shed its Tim Horton Inc. arm. The stock of a Wendy's, deprived of its only growth vehicle, has since stagnated. Ackman reaped a windfall. Wendy's long-term investors, not so much.
 
Ackman's sabre-rattling at McDonald's Corp., J.C. Penney Co. Inc., and Target Corp. has been uneventful or an outright bust. From 2004 to 2007, Ackman's funds boasted a 32 percent annual return. But in 2008, the Pershing fund set up for Ackman's assault on Target lost 90 percent of its value, and Pershing's other funds fell between 11 percent and 13 percent. If CP has aggrieved investors so does Ackman, who was obliged to "apologize profusely" for the Target fund's "dreadful performance."
 
Ackman's 2010 scheme to use a stake in ailing U.S. bookseller Borders Group Inc. to acquire rival Barnes & Noble Inc. came to nothing when Borders croaked last year with a Chapter 11 bankruptcy filing.
 
Ackman's M.O. has attracted the constabulary's attention. In each of two protracted legal tussles, Ackman won on points. He ultimately wasn't charged with wrongdoing. But the litigation nightmare forced him to shut down his first venture, Gotham Partners, and by Ackman's own account wounded his reputation.
 
·  On 17 Jan 2012, CP unveiled a $1.2-billion overhaul strategy, which would expand capacity, cut costs, and accelerate return on investment. Ackman's turnaround plan, such as it is, consists of the expedient of replacing CP chief executive Fred Green with Hunter Harrison. The latter was an astute railroader when he ran rival CN. But by his own admission, Harrison is no better informed on what makes CP tick than the average Bay Street analyst.
 
Ackman's other idea is to have CP drastically reduce in short order its operating ratio, the key industry performance yardstick, measuring cost as a portion of revenue, from 82 percent to 65 percent. It took CN close to a decade to manage that feat. As Cleghorn not unreasonably says, the pace of improvement Ackman demands "has never been achieved by any railway management team."
 
·  CP is a very different "rail" than CN, whose network spans the breadth of Canada and runs the length of the U.S. to Mexico. Calgary-based CP lacks CN's diversity of cargo and its significant presence in the industrial heartland of Canada and the U.S.
 
CP's rail network is also more heavily exposed to daunting terrain and climate than its peer "Class 1" railways. In each of the past two fiscal years, CP's margins suffered from avalanches and flooding on its routes through B.C.'s several mountain ranges.
 
·  The upside potential of Ackman's CP investment is minimal. Ackman insists he's not a "cut and run" investor. But in the 23 firms Pershing has targeted, Ackman's typical period for holding a stock has been about two years.
 
Barring the sudden reappearance of Cornelius Van Horne on the scene, there is no way CP is going to match the performance of its Big Six North American peers in two years.
 
A happy confluence of economic buoyancy, mild winters, and an early salutatory effect of Fred Green's revival strategy might eventually restore CP's share price to its most recent, 2007, peak of $87. That's a mere 20 percent gain on Ackman's $1.4-billion CP investment. That's chump change in hedge-fund land.
 
In bidding him adieu, Cleghorn might acknowledge Ackman's undoubted entertainment value by presenting him a home game of railroading, constructed from Lego. So's not to risk slighting this nuisance again, Cleghorn might first consult with his haberdasher.
 
David Olive.