By David Benoit and Juliet Chung
Automatic Data Processing Inc. has spent the past several years
trying to modernize its business. On Tuesday, shareholders will
decide whether those moves are enough or if they want to allow one
of Wall Street's most powerful and polarizing investors into the
boardroom.
Famed hedge fund manager William Ackman is seeking a seat for
himself and two others on ADP's 10-person board, saying it has
fallen behind hot technology companies that have made its
human-resources industry user-friendly.
Tuesday's vote is the first time Mr. Ackman has had to woo
investor votes since his bad bet on Valeant Pharmaceuticals
International Inc. caused billions of dollars in losses at his
hedge fund more than two years ago. A win--or even a close
vote--for Mr. Ackman could be a reprieve and show that big
investors believe he can help improve companies. A bad loss could
raise questions about his future.
Mr. Ackman and his Pershing Square Capital Management have
underperformed for nearly three years, largely because of a $4
billion loss on Valeant. Its main fund has lost 24% since 2014,
compared with a 33% climb in the S&P 500. The fund is roughly
flat this year through October, while the S&P 500 is up 17%,
including dividends.
Mr. Ackman points instead to his long-term track record, saying
Pershing Square has returned more than 500% since its January 2004
start, compared with the S&P 500's roughly 200%.
The outcome of shareholder fights typically hinges on the
specific idea on the table rather than an activist's past
performance. But Mr. Ackman's counterpart, ADP Chief Executive
Carlos Rodriguez, has sought to pressure him by hammering his
performance.
Mr. Rodriguez says he is already transforming ADP's technology,
and the company's shares have outpaced returns of the S&P 500
since he became CEO in November 2011, performance that typically
makes for a difficult activist target.
The tension between Pershing Square and ADP is highlighted by an
opinion of the biggest proxy adviser, Institutional Shareholders
Services Inc. ISS said ADP's board needs change and that Mr. Ackman
is a strong candidate to improve performance--but it stopped short
of recommending that shareholders vote for him because he might
introduce too much risk to the company. Both sides criticized ISS's
opinion. ISS said it stands by the report.
Several large shareholders, including one of ADP's 10 biggest,
said they will support the company in the vote, citing Mr.
Rodriguez's track record. Still, some of those investors believed
there was room to improve and expressed hope Mr. Ackman's presence
would pressure management.
"This was a company that got no attention from its investors or
the public," Mr. Ackman said in an interview. "As a result of our
research and the proxy campaign, the shareholders and the company
have a much better understanding of the massive opportunity to be
unlocked and that is inherently a good thing."
ADP, based in Roseland, N.J., has a stock-market value of about
$51 billion, but it isn't used to a spotlight. It helps a wide
range of companies handle repetitive HR functions like payroll and
timekeeping, and ADP says one in every six U.S. workers benefits
from its services. Still, it historically operated behind the
scenes, dealing with corporate executives not individual
employees.
At a private concert ADP held in August for employees, country
music powerhouse Blake Shelton, who opened for pop stars Gwen
Stefani and Adam Levine, joked about the company's ability to book
so many stars.
"ADP! I'll tell you what, I'm not even real sure what the hell
y'all do, " he said on stage, according to a video of the event.
"But y'all must make a shitload of money, is all I can say."
Mr. Ackman argues ADP has fumbled its industry-leading size and
position. Today, HR functions are moving into the hands of
individual employees, driven by software-focused firms like Workday
Inc. and Ultimate Software Group Inc. The activist says ADP is
insular, stifles innovation and it relies too heavily on people
while software-heavy firms run lower-cost models.
Mr. Ackman also says the company could boost its operating
margins significantly more than it plans to, though both sides have
alleged that the other manipulates numbers.
Mr. Rodriguez admits margins and technology need to improve. But
he says moving at too fast a pace risks destabilizing the
business.
"I wanted to make the company a technology company that provides
services and compliance, rather than a services company that uses
technology, which is what ADP's DNA had been for a long time," Mr.
Rodriguez said in an interview. "We are certainly closer now."
A four-year-old Chelsea office at the center of its technology
push feels like a Silicon Valley stereotype: exposed steel beams
and concrete floors, free food, napping pods tucked behind curtains
and public hackathons in the cafeteria. Mr. Rodriguez jokingly
apologized to some of his staff for wearing a suit and tie as he
toured a Wall Street Journal reporter through the office.
ADP has already moved small businesses and most of its
medium-sized clients on to new technology. For larger companies,
with 1,000 employees and up, new technology is still being built.
Mr. Rodriguez says he learned a lesson in transitioning
medium-sized firms: ADP went too fast and ran into problems dealing
with changes and the launch of the Affordable Care Act, or
Obamacare. Client departures jumped.
ADP says Pershing Square's suggestion to increase margins would
introduce risk for bigger customers by pushing them too fast, and
since such clients only change providers roughly every 20 years,
the pace needs to be careful.
Pershing Square has invested about $2.3 billion in ADP,
including $500 million it raised specifically for the stake, but it
can only vote about 2% of the company's shares because much of its
exposure is through derivatives that don't have voting power.
ADP stock is up 13% this year and has returned about 187% since
Mr. Rodriguez took over in 2011, compared with the S&P 500's
132%. It has risen 6.5% since Mr. Ackman's position was first
reported in July.
Assets in Pershing Square, meanwhile, have slumped to $9.42
billion at the end of October, from $20.2 billion in July 2015,
because of losing bets and defecting clients.
Even Mr. Ackman's victories have been unable to make up for the
bruising he took on Valeant. He quelled some concerns about his
influence last year when he got a seat at struggling Chipotle
Mexican Grill Inc., but that stock has continued slumping, losing
28% this year. Mr. Ackman recently restructured his five-year bet
against Herbalife Ltd., limiting possible losses as his position
had continued to lose money.
As Pershing Square's losses have mounted, clients have defected.
New Jersey's pension fund, the Illinois State Board of Investment
and the Colorado Fire & Police Association are among clients
who decided last year to pull their money from Pershing Square. The
influential investment consultant Cliffwater LLC also recommended
last year that its clients redeem.
Other investors, including the $2.2 billion Fort Worth
Employees' Retirement Fund in Texas, have placed Pershing Square on
a watch list for closer monitoring. The pension expects volatility
in Mr. Ackman's performance but hopes Pershing Square will revert
to its stronger historical returns, said chief investment officer
Joelle Mevi.
"We're not pleased with performance," Ms. Mevi said.
Write to David Benoit at david.benoit@wsj.com and Juliet Chung
at juliet.chung@wsj.com
(END) Dow Jones Newswires
November 05, 2017 07:14 ET (12:14 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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