Pershing Square's Bill Ackman on Friday launched a proxy contest seeking to install a minority slate of dissident directors to Automtic Data Processing Inc.'s (ADP) - Get Report board, in a move that comes after the human resource management company declined his request to reach a settlement or at least extend the deadline for board nominations.
"Based on extensive research and due diligence, Pershing Square 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 operating costs, and increasing efficiency," Ackman said in a short statement.
The activist fund issued the release several hours after ADP took the unusual step of issuing a statement suggesting that its management wasn't going to settle anytime soon with Ackman, who they argued wanted to install five dissident directors onto the company's ten-person board. The deadline for nominating directors is Aug. 10, but Ackman had hoped to get ADP to push it back so that the two sides could reach a settlement. However, ADP said it doesn't want to push back the deadline.
In its statement this morning, ADP said that Ackman wanted to see ADP's CEO, Carlos Rodriguez ousted. However, Ackman's statement this afternoon didn't make exactly that request. Instead, it said that Ackman "expressed a willingness to work with existing management or, alternatively, an external CEO candidate, to effectuate that change."
Also, Ackman said he met with ADP's CEO, Carlos Rodriguez, at the company's request. Ackman said that Pershing Square has "long admired ADP's business" and that there was "enormous opportunity to improve the operating performance" by accelerating growth, improving the quality of ADP's software and service offerings and dramatically reducing operating costs."
It is unclear what specifically Ackman is seeking. Also, it is unclear whether other investors will support Ackman's campaign, particularly considering that ADP is not struggling. Also, Ackman's recent troubles with his Valeant Pharmaceuticals and Chipotle investments suggest that investors may be wary of supporting the investor. ADP sought to capitalize on Ackman's troubles by comparing ADP's total shareholder return since Rodriguez became CEO nearly six years ago to that of Pershing Square, which has struggled of late. Ackman had an abysmal loss of 20.5% net of fees for 2015 and a loss of 12.1% after fees for 2016.
It is likely he will issue a longer list of demands along with the names of dissident director candidates at a later date. Ackman's comments about reducing operating cost could be a push to have ADP to improve its margins so that it the company's is more in line with its competitor Paychex. This could involve cutting selling, general and administrative costs as well as reduce its employee headcount.
Also, Ackman is likely going to seek to have the company hike its stock buybacks and special dividends. ADP has little debt, about $2 billion and about $3 billion in cash and cash equivalents as of March 31. As a result, it is likely that Ackman would like to see ADP conduct a significant stock buyback or a big special dividend. It is very possible Ackman may not ultimately ask for such a move but expect it. A large buyback or dividend is often the first thing a company targeted by Ackman or another major activist does as it seeks to appease disgruntled institutional investors. For example, another Ackman target, Zoetis, conducted a significant stock buyback when faced with his campaign.
Also, ADP has about $27 billion in client funds that they invest in Treasury bonds and high-grade investments. It is very possible that Ackman could push ADP to make more aggressive investments with this fund into higher yielding bonds or municipal bonds or even higher risk and lower grade corporate bonds.
Finally, Ackman makes no mention of pushing ADP to sell itself or a division. Nevertheless, activists like Ackman like to pressure companies into selling themselves or spinning off divisions. Pershing Square could push for some M&A activity at ADP. The company has a faster growing professional employer organization division, which outsources HR. It has about $3.5 billion in revenue and $450 million in EBIT as of June 30. The unit could be spun off into a free-standing operation. The move would likely help boost the combined stock of the two businesses. However, PEOs are usually sold alongside payroll services, which is ADP's primary business. Breaking them up would probably result in lost business. Two fast growing PEO competitors are cloud payroll companies, Paylocity Holding Corp. (PCTY) - Get Report and Paycom Software Inc. (PAYC) - Get Report .
Alternatively, Ackman could push to have ADP sell itself to a large business process outsourcing software company, such as SAP SE SAP. An SAP or business processing software company could like ADP because it produces stable growth and generates a lot of cash flow.