business

NEW YORK - Sitting in a glossy white conference room in his Pershing Square office that overlooks Central Park, hedge fund manager William Ackman takes on the demeanor of a man who wants desperately to be understood.

The tall, silver-haired financier is locked in battle with one of the country's biggest retailers but seems to cringe when warrior themes are used to describe his quest to put himself and four others on the board of Target Corp.

"It's not a fight, it's an election," said Ackman, 43, one of the country's most active hedge fund managers. He insists the current proxy battle has the populist goals of giving people a choice and holding boards accountable.

"The risk of great companies is that they become insular," said Ackman, who has taken on McDonald's, Wendy's, Barnes & Noble and Bloomington-based Ceridian. "The board is not willing to take outside input. If it isn't invented here, it's no good. One of the benefits of a few new board members is that it lights a fire under the company. It brings in new energy and a new focus."

In the two years since Ackman amassed what is now a 7.8 percent stake in Target, making him the retailer's third-largest shareholder, he has maintained a friendly relationship with the company he once described as "probably the best retailer in the world." This contest, he maintains, is about changing the board, not running the company.

"We support management," he insists.

But with his investment now worth a fraction of the $2 billion he paid for it and the Minneapolis-based retailer consistently spurning a key idea of his as too risky, the relationship has soured into a contentious clash for board seats. The two sides can't even agree on the size of the board, much less how to boost the stock price.

At stake is a defining influence over the future of a company that is striving to keep its iconic image strong, even as shoppers flock to Wal-Mart.

Target, which hasn't seen such outside pressure since it fended off a hostile takeover in 1987, declined to make executives or board members available. But its letters in response to Ackman's claims have become increasingly assertive.

Ackman's Pershing Square fund has 26.5 million shares in options, worth about $280 million, that expire in less than two years. In letters to shareholders, Target argues that Ackman's "sizable short-term derivatives positions" make him more prone "to favor risk-taking to affect short-term share-price performance" no matter the long-term cost to the company.

It is just the latest in the costly board campaign, featuring almost daily public filings by both sides as they try to steer shareholders in the weeks before Target's annual meeting May 28. Sometimes, six or more filings are posted in a day, and more than 40 have been entered in the past three months.

Ackman said he will spend about $10 million on the contest. Target, which has hired high-priced lawyers, proxy consultants and a New York public relations firm known for crisis communications, estimates it will pay $11.1 million. Ackman puts Target's output at closer to $25 million, saying the company told him it spends $1.6 million every time it sends a letter to shareholders.

That doesn't count the hours away from running the business as the retailer fights for its slate.

"Every letter that goes out, you can assume there have been six or seven drafts that have gone through the executive suite, general counsel, PR firms and everybody else," said Damien Park, CEO of Hedge Fund Solutions, a Philadelphia-based firm that advises companies on issues with activist shareholders. "And the board is consumed with this discussion."

Poor timing

The relationship hasn't always been combative. Ackman pushed the company to sell its credit-card receivables business and ramp up a share repurchase program. Target met him partway on both. The retailer sold almost half of its credit-card receivables to J.P. Morgan Chase and then agreed to launch a $10 billion share buyback program, though Ackman was aiming for $15 billion.

So why wasn't that enough? Some, such as corporate takeover tycoon Irwin Jacobs, see Ackman's move in a more cynical light. At the start of this year, Ackman's Target fund had lost more than 90 percent of its value, though prices have bounced up since then.

"He's trying to blame the company for his poor timing," said Jacobs, a long-time friend of retired Target CEO and board chair Robert Ulrich. Jacobs said he doesn't own Target stock and has no major business relationship with Target other than selling some products in stores.

"It's almost a desperation move. To have him come in and buy derivatives and push management to create value quicker so he can get his payday, I just don't agree with it."

A four-page filing in which Target outlines key contacts with Ackman notes the friendly thank-you call after an initial meeting and congratulatory call after the sale of the credit-card receivables. The relationship turned after the retailer rejected -- for the third time -- Ackman's suggestion that it sell the real estate under its stores. Ackman showed "significant displeasure" with Target's board Nov. 21 after it again shot down the plan, according to the filing, and Ackman "speculated that perhaps he should join the board."

In March, Ackman publicly released his board intentions. Since then, as often is the case in such proxy battles, the communiqués have sunk to tit-for-tat filings as the sides fight for votes.

Ackman, who insists "This is not about a real estate transaction," set the tone early when he threatened to let an arbitrator decide the size of Target's board. He contends there are 13 seats, with a vacancy created when Ulrich retired as board chair in January. Target says there are 12, but decided to let shareholders settle the disagreement on the proxy ballot.

In one filing, Ackman listed the companies in which he had claimed to boost shareholder value, but the Securities and Exchange Commission forced him to dial back those claims in a follow-up filing. It "is therefore not feasible to determine the precise extent [if any] of responsibility for Pershing Square's creation of value" in companies such as McDonald's and Wendy's.

Last week, Ackman complained Target's decision to hold the shareholders meeting at an unfinished store in Waukesha, Wis., put him at a disadvantage because of a lack of nearby hotel rooms and, possibly, power outlets. He submitted photos of the site and dirt-filled parking lot with his filing to the SEC.

"This is like the iceberg. We're only seeing what's above the water," said Park, who is not involved in the proxy contest. Park said settlement discussions -- from conceding a limited number of seats to Ackman to addressing the real estate proposal -- have likely been ongoing since Day 1 and could continue up to the start of the annual meeting. "There's an enormous amount of activity going on behind the scenes. That's really what's taking up a lot of time and effort."

'Let's say I am evil'

A handful of shareholders already are lining up behind Target. St. Paul-based Mairs and Power Inc., which owns 2 million shares, said Monday it would vote for the existing board. Longtime shareholder Aaron Epstein, whose father sold his California bookstore chain to the company for stock in 1968, said Target was built "brick-by-brick from 15 stores to over 1,600, not by financial manipulations. ... I worry that Mr. Ackman is putting immediate profits above long-term stability."

Analysts at Deutsche Bank proclaimed, "We side with management" in an April report to investors, but Ackman said he has met with its analysts since and they have a better understanding of his position. Morgan Stanley has not taken a stand but said in a March report that it sees the fight as an "unfortunate distraction" and considers Ackman's real estate proposal more as "financial engineering and a tax shield strategy rather than long-term value creation."

Ackman, a supremely confident businessman with an undergraduate degree and MBA from Harvard College, appears far from deterred.

"Let's say I am evil. I'd only have one vote. It's not like there's a massive change of directors. Eight of the 12 will stay no matter what," said Ackman, whose corner office on the 42nd floor is lined with photos of his wife and three daughters and has a backgammon set on a nearby table.

"When we go out and talk to shareholders, within an hour, they understand what we're about and I'm confident they'll back our candidates."

On Monday, Ackman will hold a webcast of what he calls a "Target Town Hall" in New York to let shareholders and the media interview his slate of five candidates, which he promotes as a team with a major shareholder (Ackman) plus experts in Target's key business areas of retail, credit and real estate.

Asked what ideas he has for the retailer beyond his much-discussed real-estate deal, Ackman said, "My best idea is to put smart people on this board."

Jackie Crosby • 612-673-7335