Embattled activist investor Bill Ackman is seeking to take over the board of Automatic Data Processing (ADP) - Get Report and replace the human resource firm's CEO, Carlos Rodriguez, the company said Friday.
The deadline to nominate directors is Aug. 10 and Ackman's fund, Pershing Square Capital Management, wants it to postpone the deadline so that the two sides could negotiate a resolution, ADP said. However, ADP added that it doesn't want to push back the deadline.
The embattled activist investor is seeking to install five dissident director candidates onto ADP's 10-person board and he's seeking a seat for himself. ADP said Ackman's fund owns an 8% stake, mostly made up of derivatives.
- Facebook Steps Up Its Fight Against Fake News in Kenya Ahead of Presidential Elections
- Dunkin' Donuts May Drop the 'Donuts' From Its Name -- This Isn't a Joke
Its shares are up 3% in early trading after the company's stock jumped up late last month on reports of Ackman launching a campaign.
The battle will likely be a tough one for Ackman and his activist fund. The insurgent investor has struggled in recent months. He first suffered a significant loss from a large investment in drug company Valeant Pharmaceuticals International Inc., (VRX) an allocation that led to a an abysmal loss of 20.5% net of fees for 2015 and a loss of 12.1% after fees for 2016. Most recently, Ackman has been struggling with his activist campaign and 10% stake at Chipotle Mexican Grill (CMG) - Get Report , which has taken a serious beating after customers in Virginia reporting symptoms such as vomiting, diarrhea and severe stomach pain after eating at the restaurant chain.
A spokesman for Ackman declined to comment. It's unclear whether Ackman will go ahead and pull the trigger on what likely would end up being a very costly director-election proxy contest.
Nevertheless, Ackman likely has three areas of focus with his investment in ADP.
1. Buybacks and dividends
The company 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 major stock buyback when faced with his campaign.
In addition, 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.
2. Sale or spin off
Activists like Ackman like to pressure companies into selling themselves or spinning off divisions. Pershing Square is likely to 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. It 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 outsource software company, such as SAP SE (SAP) - Get Report . An SAP or business processing software company could like ADP because it produces stable growth and generates a lot of cash flow.
- Introducing One of the Only Executives That Appear Wildly Bullish on Snap's Prospects
3. Margin improvement
Finally, Ackman could push for 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.
"This speculation ranged from a push to improve margins (ADP's margins are well below that of Paychex's), split up the company (Employer Services and PEO Services), more aggressive use of the company's cash and float, acquisitions or an outright sale," BMO Capital Markets said in a release.
More of What's Trending on TheStreet:
- This Part of the U.S. Jobs Market Recovery Has Been One Big Mystery
- This Company Has More Than $450 Billion in Sales and Has a Shot to Take Down Amazon, Jim Cramer Says
- 10 Best-Performing Stocks in the Dow: Cramer's 'Mad Money' Recap
- Tesla Headlines This Lineup of 12 Amazing New Cars for 2018