William Ackman: Opinion is mixed on whether his activism makes companies stronger or merely generates short-term gains.

Daniel Barry, Bloomberg News

William Ackman: Targeting Target

  • Article by: Chris Serres
  • Star Tribune
  • January 13, 2008 - 12:15 AM

William Ackman is a hard man to pin down.

He's a multimillionaire hedge fund manager from New York who talks fast, yet he pokes fun of the image of fund managers as "fast-talking guys who drive Bentleys."

He believes in "sticking to the facts," as he calls it, yet he got so emotional over supportive comments on a recent conference call that tears were shed. "It was my Hillary moment," he joked in a recent interview.

And while he heaps praise on senior management at Target Corp., in which he's amassed a nearly 10 percent stake this year, he's pressuring the discount retailer to sell its $8 billion credit-card portfolio. And, though unlikely, he's not ruling out the possibility of pursuing a change in corporate directors.

Ackman, 41, is part of a new breed of activist hedge fund managers who defy easy categorization. His strategy involves quietly building stakes in companies and then using that stake to wring often one-time gains out of management. But unlike the corporate raiders of the 1980s, which bullied companies into slashing costs and moving operations overseas, Ackman isn't interested in rescuing dying companies. 

"His game is to drive up the stock and get out -- fast," said Howard Davidowitz, chairman of a New York investment banking and consulting firm.

It has become an increasingly popular approach. The number of hedge funds in the United States describing themselves as "activist" has swelled from fewer than 20 a decade ago to more than 200, according to consulting firm Hedge Fund Solutions of Philadelphia.

About 60 percent of the time they get the company to acquiesce to their demands, according to a recent study by two professors at New York University's Stern School of Business, who analyzed 155 transactions by hedge fund activists.

One reason for their success is that corporate boards often would rather give in to activist hedge fund managers than face the embarrassment of losing their board seats in a prolonged proxy fight. "When their demands are out there in the public domain, a board is more willing to take it seriously," said Damien Park, president of Hedge Fund Solutions.

But even among his activist peers, Ackman is considered something of an anomaly. He flipped hamburgers for an afternoon at a McDonald's in Florida to confirm his view that the chain should get out of the business of operating its own restaurants -- and stick to franchising.

Though Ackman's rabble-rousing approach has earned him rich rewards -- his fund has scored a remarkable 32 percent annualized return since its formation in 2004 -- opinion is mixed on whether his activism makes companies stronger, as he claims, or merely generates short-term gains for Ackman and others who invest with him.

"He's a greedy capitalist," said Tim Nantell, a finance professor at the University of Minnesota's Carlson School of Management. "But greedy capitalists look around for companies that are not getting every dollar out of a company they should be and they push them to be more efficient. It's how the system works."

Ackman came of age after the corporate raiders of the 1980s, immortalized by actor Michael Douglas as Gordon Gekko in the movie "Wall Street." In fact, he has nothing but disdain for funds that "cut and run," as he calls it, by purchasing large stakes, threatening management and then dumping shares for a quick profit. Yet, he's equally critical of boards that give in to those demands to preserve their reputations.

"There are some companies that rush to sell to avoid boardroom-director embarrassment and losing a proxy contest," he said. "There, shareholders end up leaving real money on the table."

A Spitzer target

Ackman was raised in Chappaqua, N.Y., the younger of two children born to a family steeped in the commercial real estate business. His father, Lawrence Ackman, is chairman of Ackman-Ziff Real Estate Group, a New York-based real estate financing firm.

The young Ackman, who has both an undergraduate degree and an MBA from Harvard, in 1992 started an investment firm known as Gotham Partners with a fellow Harvard graduate. The twentysomething investors made a series of smart bets, including an investment in Rockefeller Center Properties that more than doubled Gotham's money.

In 1995, just three years out of business school, Ackman teamed up with Leucadia National, an insurance and real estate company, to make one of just a handful of serious bids for Rockefeller Center when it went on the sales block. They lost, but it got Ackman noticed. By 1998, Gotham Partners had grown to more than $500 million in assets, and he was investing more of his money in private companies.

In 2002, however, Ackman's young career took a decided turn. The New York Supreme Court blocked a merger between one of his investments, Gotham Golf, and First Union Real Estate in response to a lawsuit by preferred stockholders. Ackman decided to stop making investments and wind down Gotham because of the distraction of the litigation. (A New York appellate court later ruled in Ackman's favor and reversed the Supreme Court's decision.)

In 2003, then-New York Attorney General Eliot Spitzer launched an investigation into Gotham's trading practices after the investment firm wrote an article praising a company, Pre-Paid Legal Services, and then sold its stock. Ackman said he liquidated Pre-Paid's stock, as well as all of its public investments, because he was winding down his fund.

In the end, Spitzer found no wrongdoing -- no charges were ever filed -- but the highly public investigation was hard on his wife and three daughters. "People look at you funny," he said. "I learned that it takes a lifetime to build a reputation, and someone can destroy it in a few days." (Ackman said he holds no grudge against Spitzer and cast a vote for him for New York governor.)

'Frightening' Ceridian

In 2004, Ackman started his career anew by launching Pershing Square Capital Management with $54 million from himself and Leucadia National.

He wasted little time picking targets. Ackman bought a stake in Wendy's International early in 2005 and pressured the company to spin off its Tim Horton's doughnut chain. After initially resisting Ackman's demand, Wendy's spun off Tim Horton's through an IPO in March 2006, raising $670 million for Wendy's investors.

Ackman sold his Wendy's stock in November 2006, protesting the company's choice of Kerrii Anderson as CEO.

Though Ackman's investment in Wendy's nearly doubled in value, the stock has since slid to just $24 a share -- below the $37 a share price Ackman paid. Some investors argue that, by removing one of its fastest-growing units, Ackman left Wendy's in worse shape -- as little more than a second-rate burger chain.

Ackman blames Wendy's board for failing to heed his advice and not hire Anderson. "In my previous dealings with Kerrii ... she simply stonewalled us and ultimately forced us to go public with our recommendations rather than take a meeting with us privately," he wrote to Wendy's Chairman James Pickett.

One of Ackman's next targets was Ceridian Corp., the Bloomington human resources firm. Ackman recalled his first meeting with Kathryn Marinello, Ceridian's CEO, as "frightening" and "one of the worst meetings of my career."

Ackman said that Marinello -- who he noted wore inexpensive jewelry and clothes to the meeting -- spoke at length about her plans to grow the company through acquisitions, an idea that he opposed. He also recalls that Marinello said she already had enough money and that her strategy for growing the company was not driven by a desire for personal enrichment.

"She was proud of the fact that she had no economic ambition," he said in a recent interview. "That's disconcerting to a shareholder."

Ackman, who amassed 15 percent of the company's shares, questioned Marinello's strategy, tried to fill the board with his own independent nominees and pushed for a spinoff of its strongest division. The company ultimately sold itself to a private equity firm and private insurer for $36 a share, an amount that Ackman initially thought was too low. He made about 50 percent on the investment.

Though six months have passed since the Ceridian sale, Ackman still talks about the employee who voiced her support for him during a conference call with shareholders. "I was speechless. My eyes teared up," he said. "She was an important voice of reason" on the call.

Ceridian officials declined to comment for this story.

So far at Target, Ackman has been far less confrontational. After disclosing his initial, 9.6 percent investment in July, he extolled the company as "probably the best retailer in the world." He also spoke fondly about how his family loved to shop there.

Target took him seriously almost immediately. In August, two of the retailer's top executives -- chief financial officer Douglas Scovanner and then-president and soon-to-be-CEO Gregg Steinhafel -- flew to New York to meet with him. Armed with charts and graphs, he delivered a three-hour presentation on why the retailer should sell its $8 billion in credit-card receivables.

"They were extraordinarily receptive, thoughtful and responsive," he said. A month later Target announced it had hired Goldman Sachs to help it consider whether to sell its credit-card receivables.

A tour of Target

Ackman also paid a visit to Target's headquarters just before Christmas, which included a tour of the downtown Target store. Employees at the store were told to spruce up the aisles and to be particularly courteous, said one store employee, who declined to be identified. Target officials confirmed that Ackman had meetings with Target executives in Minneapolis and New York.

Ackman said he's not currently considering plans to propose directors at Target. However, Pershing has run a proxy contest before, with Ceridian, and he's not ruling out the possibility of nominating board members if he doesn't achieve his objectives.

"The probability of our running a proxy contest is as close to zero as it could get," he said. "But in this line of business, you don't rule anything out."

Added Ackman: "I've got three kids, and a proxy fight really sucks up all your time. Ceridian was Pershing's first proxy contest and hopefully our last."

Chris Serres • 612-673-4308

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