Beleaguered activist investor Bill Ackman on Thursday, Aug. 17, escalated his campaign to install three dissident directors onto Automatic Data Processing Inc.'s (ADP) - Get Report board with a 167-page presentation and three-hour call with analysts and investors arguing that the payroll and human resource management company should cut staff, integrate operations, focus more on innovation and technology.
The battle has left many scratching their heads. Activists typically target struggling companies, often with leadership vacuums. However, many analysts and investors don't believe that ADP 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.
Nevertheless, Ackman, who has an 8% stake in the ADP, argued that analysts and many others don't understand the human resource company's business or the full panoply of its competitors. He suggested that the $50 billion market capitalization company that started in payroll systems has had a difficult time rivaling competitors like SAP, Oracle, Workday and Ultimate Software in the market for national enterprise customers because its back end infrastructure is "disjointed, dated" and has not been integrated effectively.
The fund manager behind Pershing Square Capital Management LP insisted that ADP's share price could more than double by 2020 if it followed his plan. He suggested that ADP has sought to compete with rivals when it comes to technology innovation by making acquisitions but that those businesses have not been combined properly, leading to a bureaucratic business with eight different reporting and analytical tools and lots of staff around the U.S. that are needed to assist with what he sees as a weak technology offering. Alternatively, Ackman would like to see the pay plans for top executives restructured and the company's implementation team integrated in a way that would allow for a reduction in staff.
"People don't like waiting 45 minutes with a call center when they can do it themselves if the technology works effectively," Ackman said.
He also blasted ADP for spending $850 million a year on R&D for "systems development and programming" while competitors Paycom, Paylocity and Paycor have eaten into its business but only injected about $330 million collectively on R&D since 2011. Finally, Ackman said that ADP has a unique data set, with small, mid and large sized clients around the U.S., which data experts have suggested could be spun off into a "multi-billion-dollar" standalone operation.
"We've talked to people who managed big data operations who have told us that they view the ADP data set as a treasure trove," he said.
The presentation comes as prospects that the two sides could reach a settlement that involved the installation of some Pershing Square directors appears to have dimmed in recent weeks after the boardroom battle became public.
In a statement, ADP said it was committed to "engaging constructively" with shareholders on important issues but it "strongly" disagreed with many of the assertions made by Ackman in his presentation. The company said that Ackman didn't present anything that hadn't previously been analyzed by the board and management.
Earlier this month, on Aug. 4, ADP revealed in a statement that Ackman had privately been seeking to oust the company's CEO, Carlos Rodriguez, by installing five dissident directors onto the company's board, a move that would effectively give the activist effective control of the company. After that, on Aug. 10, Rodriguez took to CNBC to say that Ackman was acting like a "spoiled brat" in his quest to shake up the human resources management company.
On his call Thursday, Ackman said that considering Rodriguez's reaction to his campaign that it is likely that ADP will require a change in CEO. He added that ADP's executive compensation should be adjusted to "achieve smooth results" over a period of time.
On Monday, Pershing Square revealed through a filing that Rodriguez had mistakenly sent an email to Ackman instead of ADP's general counsel. In that email, Rodriguez stated that he did not think Ackman's willingness to work with him was credible.
Ackman set up a website "adpascending.com" to promote his campaign, and he plans to hold an analyst lunch later Thursday to explain his proposal.
It is yet to be seen whether analysts or investors will support Pershing Square in its efforts. One thing is clear is that Ackman is sorely in need of a win and his recent losses will be used against him by ADP over the months to come. The company sought to capitalize on Ackman's troubles by comparing its shareholder returns since Rodriguez became CEO nearly six years ago to that of Pershing Square, which hasn't performed well 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.
Ackman was not getting much help on Thursday. Robert Chapman, a former activist fund manager who was one of the early employers of the "poison pen" letter to CEOs, has come out of the woodwork with a short-selling campaign at ADP. Chapman argues that ADP's competition is fierce and its rivals have equity valuations driven by revenue growth while ADP must focus on earnings. "Making sure that a new client payroll, [Professional Employer Organization] contract is signed up at the right price is not nearly as important as just getting the contract signed before quarter end," Chapman said. "So in these bake offs between incumbent ADP and the young upstarts, you can bet that the latter is not going to lose on price."
He added that ADP is falling steadily "towards the end of any employment cycle and after an 8-year bull market" and that a major investment in the company today "doesn't seem all that prudent."
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