Billionaire activist Bill Ackman on Tuesday evening defended a blockbuster campaign he has underway at Automated Data Processing, (ADP) - Get Report arguing during an hour-long call intended to reach the payroll firm's large retail investor base that the company's corporate headquarters and U.S. offices should be integrated.
"The opportunity here is relatively straightforward," Ackman said on a webcast. "Restructure the organization, reduce its complexity, redesign the incentives, make it focused more on the clients, reduce bureaucracy and consolidate the footprint of the real estate."
The comments come as some investors, including Omega Advisors' Leon Cooperman, who once held a board seat at ADP, point to ADP's overall record of share-price improvement and don't believe that the company is struggling or needs a significant refocus.
Also, Ackman's recent troubles with investments in Valeant Pharmaceuticals International Inc. (VRX) and Chipotle Mexican Grill Inc. (CMG) - Get Report suggest that investors may be wary of supporting the investor. ADP has fought back, pointing out that its total shareholder returns have significantly outperformed the S&P 500 in recent years.
Ackman is seeking to gain the support of retail investors, a significant block, representing about 28% of ADP's shares for a contest he has underway to install a minority slate of three dissident director candidates at the company's annual meeting on Nov. 7.
As a group, retail investors tend to vote with management, if they vote at all. However, proxy solicitors point out that Ackman hasn't spent much capital on the campaign, which suggests that he isn't allocating too many funds towards retail investor outreach. The activist investor, however, went to particular trouble to provide a visual take on his thesis to retail investors on the webcast, offering up his phone number and including an animated video to explain to investors how to vote. He also argued that a vote in the ADP election was the equivalent of voting for president, a congressman or senator.
"Your vote is very important. You may own only 100 shares and most people in that situation don't have time to read the material. We've tried to lay out the situation here," Ackman said. "If you want the status quo you vote for management."
In his presentation, Ackman focused some attention on ADP's real estate footprint, with 130 offices around the U.S. He argued that many of these offices are a "vestige" of a previous era when payroll services needed costly physical offices in a variety of locations. He added that ADP owns nearly four million square feet of real estate, which he argued "is going to have value." The comments suggest that Ackman believes that some offices could be closed and the real estate sold. In addition, he reiterated that ADP's corporate headquarters are located in multiple offices in various locations that should be consolidated.
He also pushed to have ADP eliminate various layers of management, arguing that they need to be substantially reduced to compete with key payroll and human resource rivals, such as Paychex Inc. (PAYX) - Get Report , which have much less bureaucracy.
"ADP has way too many layers of management," Ackman said. "That's not an efficient business. Paychex has five layers of management."
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Ackman also reiterated his effort to refute ADP's argument that it has outperformed Pershing Square in recent years. The payroll and human resource management company argues that its performance is about seven times greater that Ackman's during the tenure of its CEO, Carlos Rodriguez. However, Ackman shot back, pointing out that his fund has had total returns of over 500% over the life of his Pershing Square fund, from 2004 through December, well above ADP's returns over that same time period. He also argued that the company inflated its performance, partly by including the performance of a division that was later spun off.
Activists often like to point out that they have skin in the game, a major economic stake that aligns them with other shareholders. Ackman, who is seeking a director position for himself, argued that as a board member he would have a great incentive to push the company to perform well for shareholders because, with an 8.3% stake, his fund, Pershing Square, has a lot of "skin in the game." In addition, Ackman pointed out that his two outside director candidates, Veronica Hagen and Paul Unruh, who he discovered by using a head hunter firm, have acquired significant positions themselves in the company. That, he says, ensures they are also interested in the firm's share price improvement.
A key problem for Ackman's campaign is convincing investors that much of ADP's problems lay in the future and that the company will struggle to compete with rivals, including Paychex, in the years to come. He has been pushing it to cut staff, integrate operations and focus more on innovation and technology so that its margins can get closer to those of Paychex, a smaller competitor.
He also continued to criticize two major divestitures, arguing that both companies that were sold, Solera, formerly ADP Claims Services Group, in 2006 and CDK, in 2014, have done significantly better after they left ADP. He noted that CDK's profits of the business are up more than 60%.
ADP's shares trade at about $114 a share, up a fair bit from the $103 a share they were trading at in late July immediately prior to the first report of Ackman's involvement in the company.