Ackman Says Changing ADP Will Likely Require a New CEO

Activist hedge fund manager Bill Ackman has gotten such a hostile reaction from the CEO of his latest target, payroll processing giant ADP — which he calls a “lethargic and inefficient sleeping giant” — that he now thinks that the man may have to go.

Ackman said that at the start of his campaign he had been “open-minded” about keeping Carlos Rodriguez, a fellow Harvard graduate whom he called “ a good honest capable person” who “wants the best for ADP.” But “having seen the reaction from Carlos,” the activist is now having second thoughts. “It’s very likely this will require a change in the CEO of the company,” he said.

Ackman made the comments near the end of a three-hour webcast and 168-slide-deck presentation Thursday morning in which he laid out the problems facing ADP, the world’s largest payroll processor with a $49 billion market cap. Pershing Square has an 8.3 percent stake in ADP, which swiftlyrejectedthe hedge fund firm’s request to avoid a proxy battle by extending a nomination deadline to allow it to show its findings and suggestions for a “transformation” of the company. The stake was disclosed on August 4. Initially, ADP claimed Ackman wanted to control the company with five board seats and fire Rodriguez — both of which Ackman denied was the case in Thursday’s webcast.

[II Deep Dive:Ackman’s Pershing Square Gears Up for Battle with ADP]

After six months of research, which involved speaking to some 85 former ADP employees, competitors, and brokers, Pershing Square painted ADP as a behemoth that is “materially underperforming its potential” and is “losing ground.” Its big U.S. clients appear to have declined by almost 50 percent since 2009, according to Pershing Square’s analysis. Complex and opaque accounting has concealed these problems, and insular management with a bloated corporate structure has been reluctant to address them, Ackman said.

ADP said in a statement that it “strongly disagrees with many of the assertions made by Mr. Ackman,” adding that “ADP is not resting on its laurels.” The company has touted its long-term stock performance, saying its stock has gained about 202 percent, including dividends and shares of spinoff CDX, over the past six years of Rodriguez’s tenure. But this year ADP has lagged the S&P 500 significantly, as it is now up only 2.28 percent in 2017, compared with a gain of about 9 percent for the index.

ADP’s use of what Ackman calls outdated and competing technologies has led the company to have what hedge fund manager Leon Cooperman, a former board member, called a “high-touch” business model. Ackman argues that doesn’t compensate for its technological weakness, which is allowing interlopers to gain ground.

“ADP has enormous upside if it can transition to a real technology company,” Ackman said on the webcast. “We think this is one of the greatest sales forces in the world. We think the company’s lagging performance on the product side has made the salesperson’s job much more difficult, and that’s really the problem...We think there are a lot of incredibly hard working people who are incredibly frustrated at ADP.”

The stock fell about 4 percent as Ackman and his partners laid out their case — a decline Ackman attributed to his airing of ADP’s “dirty laundry.” At one point during the presentation, he said, “We’re scaring the shit out of shareholders.”

Ackman’s plan, which he says could increase margins substantially and double the stock price, has been met with skepticism. “We faced the same issue with Canadian Pacific,” he said, but margins actually increased more than expected. Pershing Square explained how it thinks margins could improve in each of ADP’s business segments, leading earnings per share and the stock price to double from current levels in less than four years. By June of 2021, it could rise to $221 to $225, the hedge fund firm argued.

Despite the CEO’s resistance to Ackman, the activist said there has been a “turnaround” by the board since Pershing Square filed its proxy on August 7, nominating a minority slate of three candidates to the board. The ADP board has already interviewed two of the nominees — Veronica Hagen, the former CEO of Blackstone-owned Polymer Group, and Paul Unruh, a former executive at Bechtel. Ackman, the third candidate, was being interviewed later Thursday afternoon. A meeting with the board is set for Sept. 5.

“There are strong signals we can resolve this without going to a proxy contest in November,” said Ackman, who indicated during the presentation that he wasn’t set on ousting any of the current board members.

Earlier in the week, Ackman got some support from proxy advisor Egan Jones, whose Kevin McManus criticized Rodriguez’s hostility to Ackman in a note to clients, writing that Rodriguez “highlights the lack of shareholder input into running and growing the company.”

“A CEO must always realize that they serve at the pleasure of the board and the shareholders,” McManus wrote.