Pershing Square takes 8 percent stake in ADP

On July 27th word broke that Bill Ackman’s Pershing Square Capital has taken an 8% position in Automated Data Processing (ADP), making it Pershing Square’s largest investment. Shares of ADP rallied 11% on the announcement.

As Ackman’s proposition to present his research and suggestions to the full board was rejected bij the company’s management, the activist investor took his ideas to the public through a 3.5 hours webcast on August 17th.

Pershing Square has long admired ADP’s business and previously was an investor in the company from 2009 to 2011. And ADP looks like a typical Pershing Square investment, with a stable business and little leverage (no net debt in this case). However, in Ackman’s view the company has become a sleeping giant that will lose out to its growing list of competitors if it does not take drastic steps to righten the ship in order ro achieve its full potential. Ackman believes that there is an enormous opportunity to improve the operating performance of ADP by accelerating growth, improving the quality of ADP’s software and service offerings, dramatically reducing operational costs and increasing efficiency. Also, the firm’s management compensation scheme provides suboptimal incentives. Taking the right steps could lead to a doubling of the shareprice in about 4 years time, according to Pershing Square.

Especially given the initial reaction of ADP’s CEO to Pershing’s approach, it is likely that Ackman will seek to have the CEO replaced in order to get the proposed changes implemented. He has been down this road several times before. At Air Products, Canadian Pacific and J.C. Penney, Ackman was successful in getting his CEO pick to take the top job shortly after he announced his stake. At recent investment Chipotle Mexican Grill, the co-CEO stepped down and Ackman’s firm got two board seats.

The Pershing Square board nominees, who will be proposed at ADP’s forthcoming annual meeting of shareholders are Bill Ackman, Veronica Hagen and Paul Unruh, the latter two of which are independent and have no prior business or personal relationships with Pershing Square.

Ms. Hagen was formerly the CEO of Polymer Group which was acquired by Blackstone Group. Ms. Hagen continued to serve as Polymer’s CEO until her retirement in 2013 and remained on the Board until 2015 when the company was sold by Blackstone to Berry Plastics Group, generating a nearly 3x multiple on invested capital.

Ms. Hagen is currently a director, having previously served as lead director, of Southern Company, a $49 billion market capitalization public utility holding company. She also serves as a director and Chair of the Compensation Committee of Newmont Mining Corporation and as a director of American Water Works Company.

Mr. Unruh held several senior leadership positions at Bechtel Group, one of the largest private corporations in the world, including Vice Chairman, CFO, Controller, Treasurer and Manager of Financial Systems Development. At Bechtel, Mr. Unruh was a member of the three-member executive committee responsible for overall direction of the firm.