Pershing Square Capital Management, L.P. (“Pershing Square”)
today sent a letter to the Board of ADP (NASDAQ:ADP).
The letter is available here:
https://adpascending.com/shareholder-materials/. The text of the
letter is set forth below:
To the Board of Directors of ADP:
I recognize that we are in the midst of a proxy contest and that
the election is less than a week away. I also understand that the
full board does not review press releases before they go out so I
haven’t taken any of your press releases personally. That said, it
is important that we get along for the benefit of all of ADP’s
stakeholders, and that we keep this contest focused on the
substantive issues at hand.
We intend to be a major shareholder of ADP for a long time. As
such, we care about the company’s reputation and its credibility.
When the company issued a press release yesterday in response to
our letter to ISS (which can be found here), it unfortunately
continued to make various misleading and unsupportable statements
that could prove damaging to the company’s credibility and
reputation.
Many assertions in ADP’s press release were unrelated and/or
nonresponsive to the issues we raised in our letter to ISS, or
inaccurate as we detail below. Sophisticated institutions who
follow ADP have the time and resources to analyze these issues, and
as a result, they are not likely to be misled by ADP’s press
release. Small investors, however, who do not closely follow the
company, are more likely to be misled by the company’s statements.
This is unfortunate.
For example, when we explained that ADP appears to have misled
ISS by convincing it to evaluate ADP’s employee productivity
inclusive of PEO pass-through revenues while excluding other PEOs
in its competitor set, the company responded by pivoting to an
irrelevant claim – that ADP’s employee productivity has improved
modestly in recent years. We had publicly asked the company why its
employees’ productivity is 28% below competitors’. Rather than
respond to our question publicly for all shareholders, the company
did so privately for ISS in an intellectually dishonest manner. ADP
knows better than to do so. ADP itself excludes PEO pass-throughs
in its shareholder presentation in calculating net operational
margins. For the company to include the benefit of gross PEO
revenues in its productivity calculations is disingenuous at best,
misleading to investors, and damaging to ADP’s credibility and
reputation.
Furthermore, ADP has lost material market share to competitors
in the Enterprise segment. To suggest otherwise, i.e., that
“comparable” clients are “largely consistent” is misleading. While
perhaps ADP has kept the payroll account for some of these
historical clients, it has lost numerous others, along with many
clients’ more profitable and faster-growing HCM business to
Workday, Ultimate Software, Ceridian Dayforce, and others.
That is why ADP’s Enterprise business
revenues have declined over the last eight years during a period
when the Enterprise HCM market has grown substantially.
Suggesting that ADP has retained these clients when it has lost the
large and growing HCM revenue opportunity to competitors is
misleading.
An ISS report is not the best place to make a product launch
announcement. If indeed ADP is launching “Vantage 2.0” imminently,
and it will offer better service and help recapture lost market
share as ADP apparently privately disclosed to ISS, then ADP should
disclose this fact to shareholders, describe the new product’s
features, functionality, and ease of use, and release a beta
version for testing by industry consultants. Telling a proxy
advisory service that ADP has an undisclosed solution to its market
share losses in the Enterprise segment while unwilling to share the
same information with shareholders doesn’t strike us as proper or
credible disclosure.
It is similarly misleading to suggest that we have compared
ADP’s margins with CDK (formerly Dealer Services). CDK and ADP are
different businesses in different industries, and we have never
compared their margins. What we have done, however, is shown how
much progress CDK has been able to make once it was freed from
ADP’s oversight and control. When CDK was owned by ADP, management
stated that 50 basis points per annum of operating margin progress
was all that could be achieved. As an independent public company,
CDK has increased margins by more than 1,000 basis points in three
years, and has projected 900 basis points of additional margin
expansion over the next two years, vastly more than ADP claimed was
possible. The CDK comparison shows how much progress can be made by
a business formerly owned by ADP if a different approach is taken
to operations, incentives, and governance, which is instructive for
what is possible at ADP.
In response to significant shareholder support for our views on
ADP’s potential to substantially increase its margins, ADP has
recently pivoted to overstating the margin improvement its plan can
deliver. ADP’s recent claims that its plan will lead to
“operational margin” improvements of 500 to 600 basis points does
not foot with the company’s plan to deliver 100 to 200 basis points
of projected operating (EBIT) margin gains by 2020. The math just
doesn’t work. We and other shareholders have asked the company to
clarify this 500+ basis point number, but the company has not been
willing to do so. Yesterday’s press release, which reiterated the
“500 basis point plan,” is misleading and unsupportable, as are the
many recent ADP communications in which the same claim is made.
Continuing to make an inaccurate claim only digs the company into a
deeper hole. If there is a supportable basis for this calculation,
please provide it to shareholders on Thursday’s earnings call. If
not, the claim should be withdrawn.
Lastly, you are of course free to submit whatever complaints you
would like to the SEC. You know, of course, that in a proxy contest
both sides write letters to the SEC complaining that the other side
has put out false and misleading information. This practice is
sufficiently common that there is a name for these letters. They
are called “bed bug letters,” and are entirely ordinary course in
every proxy contest. Putting out a press release saying that you
are reporting me to the SEC is a move designed to smear my
reputation for a tactical advantage in a proxy contest. It is not
an appropriate thing to do, nor is it fair play.
On November 7th, shareholders will have an opportunity to select
whom they would like to represent them on the board. The key issue
for investors in this election is whether ADP’s status quo is
adequate, or whether ADP should strive to improve its performance.
Shareholders will decide if ADP would benefit if a major
shareholder joined the board along with Ronee Hagen and Paul Unruh
– three independent directors with substantial operating and board
experience in business transformation and corporate efficiency.
The completion of the proxy contest, however, is not the end; it
is the beginning. We are going to have to work together for years
to collectively do what is in the best interests of shareholders.
Let’s keep this in mind so that cooler heads prevail.
We have scrupulously avoided name calling, unfair tactics, and
other attempts to malign management or the board in this contest.
We have focused on the facts, namely that ADP is vastly
underperforming its potential. No one likes to hear that they have
underperformed their potential. I understand that. I also know that
proxy contests bring forth emotions, and people may say things that
they later regret.
Once the shareholders vote, however, all of us must put the
proxy contest behind us and be entirely focused on what is in the
best interest of the company and its shareholders. Having met the
full board, I am confident that we can work together collegially
and expeditiously to address ADP’s weaknesses and shortcomings for
the benefit of all of the company’s stakeholders. ADP’s
stakeholders deserve to be represented by fiduciaries who put their
emotions aside and do what’s right in advancing their
interests.
ADP is a great company. Let’s start working together to make ADP
the best company it can be.
Respectfully,
William A. Ackman
For additional information, visit our website:
www.ADPascending.com. Follow ADPascending on Facebook, Twitter and
YouTube.
To vote for Pershing Square’s Nominees for ADP’s Transformation
and ensure that Bill Ackman, Veronica Hagen and Paul Unruh are
elected to the board, shareholders should vote the GOLD Proxy Card
or GOLD Voting Instruction Form.
THE ONLY WAY TO VOTE FOR BILL
ACKMAN AND THE NOMINEES FOR ADP’S TRANSFORMATION IS TO VOTE THE
GOLD PROXY CARD OR VOTING INSTRUCTION FORM.
You can vote by Internet or telephone by following the
directions on your GOLD Proxy Card or Voting Instruction Form. You
should no longer vote by mail as mailed Proxy Cards and Voting
Instruction Forms will not arrive in time to be counted in the
November 7 election. We urge you NOT to vote using any white proxy
card or voting instruction form you receive from ADP. Please
discard the white proxy card.
If you have any questions about how to vote your shares, please
contact our proxy solicitor, D.F. King & Co., Inc., at (866)
342-1635.
About Pershing Square Capital Management, L.P.
Pershing Square Capital Management, L.P., based in New York
City, is a SEC-registered investment advisor to investment
funds.
This press release relates to Pershing Square’s solicitation of
proxies in connection with the 2017 annual meeting of stockholders
of ADP.
The information contained in this press release (the
“Information”) is based on publicly available information about
Automatic Data Processing, Inc. (“ADP” or the “Company”), which has
not been independently verified by Pershing Square Capital
Management, L.P. (“Pershing Square”). Pershing Square recognizes
that there may be confidential or otherwise non-public information
in the possession of ADP or others that could lead ADP or others to
disagree with Pershing Square’s conclusions. This press release and
the Information is not a recommendation or solicitation to buy or
sell any securities.
The analyses provided may include certain forward-looking
statements, estimates and projections prepared with respect to,
among other things, general economic and market conditions, changes
in management, changes in board composition, actions of ADP and its
subsidiaries or competitors, the ability to implement business
strategies and plans and pursue business opportunities in the human
capital management industry. Such forward-looking statements,
estimates, and projections reflect various assumptions by Pershing
Square concerning anticipated results that are inherently subject
to significant uncertainties and contingencies and have been
included solely for illustrative purposes, including those risks
and uncertainties detailed in the continuous disclosure and other
filings of ADP with the Securities and Exchange Commission at
www.sec.gov. No representations, express or implied, are made as to
the accuracy or completeness of such forward-looking statements,
estimates or projections or with respect to any other materials
herein. Actual results may vary materially from the estimates and
projected results contained herein.
View source
version on businesswire.com: http://www.businesswire.com/news/home/20171101005707/en/
Pershing SquareFran McGill, 212-909-2455McGill@persq.com
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