William Ackman seems to be backpedaling a bit on a purported plan to seize control of Automatic Data Processing Inc., but analysts who cover the company are scratching their heads as to why it is in the activist investor's crosshairs at all.
Pershing Square Capital Management LP recently notified ADP that it held 8% beneficial ownership in the company. ADP in an Aug. 4 press release said Ackman wanted to replace President and CEO Carlos Rodriguez, and indicated that he planned to nominate five directors to the company's 10-member board.
But shortly after the ADP statement was released, Ackman told CNBC he is not seeking to take control of the company. CNBC reported that Ackman plans to nominate a minority slate of four directors or fewer, not the five that ADP reported. Pershing Square later announced it would nominate a minority slate.
In response to Ackman's comments to CNBC, a source familiar with the matter said that ADP properly represented Pershing Square's position.
"This is what was asked of the company, and this is what the company is responding to," the person said. "And if [Ackman] sensed that his position isn't very strong and wants to change his representation of that, then take that for what it is."
Rodriguez's message to ADP employees was also strong. "We expect Pershing Square to continue to attack ADP and to nominate directors in the coming days," the CEO wrote in an internal company note.
ADP's investor relations team told Bernstein analyst Lisa Ellis that it has not received Pershing Square's proposed changes in writing, or Ackman's rationale for why he should take control of the company. Ackman reportedly told the investor relations team that he "had someone in mind" to replace Rodriguez, but did not reveal a name. Ellis said in an Aug. 4 note that she is surprised Pershing took a "seemingly antagonistic stance," rather than a more collaborative approach. The analyst added that she did not agree with Ackman's purported bid to oust Rodriguez.
Pershing Square said it intends to submit an ownership filing Aug. 7.
Other analysts have also questioned Pershing Square's move. Wedbush analyst Moshe Katri believes ADP's management has done a great job and trying to extract value could impact the company's long-term viability, he said in an Aug. 4 note.
Morningstar analyst Colin Plunkett said traditional methods of unlocking value through cost cutting, acquisitions or divestitures would be challenging.
"It's hard for me to look at ADP and see where he can unlock value," Plunkett said in an interview. "It would be difficult to transform in the way that [Ackman] normally attempts to."
Rodriguez was hired as the company's CEO in November 2011, and the company has consistently delivered stronger returns than the S&P 500 over his tenure.
Given Rodriguez's success as CEO, Plunkett believes investors are more likely to support management, which has been "consistent and generous" with dividends, rather than Ackman.
"Ackman's recent track record doesn’t suggest that investors should support him over ADP's management team," he added. Earlier this year, Ackman apologized for his investment in Valeant Pharmaceuticals, which cost his company $4 billion. Since 2012, he has repeatedly tried to short the stock of Herbalife, claiming it is nothing more than a pyramid scheme.
In his internal note, Rodriguez reiterated that ADP's board and executive team have confidence in the company's long-term strategy and planned investments.
"It is vitally important that we all stay engaged in our day-to-day responsibilities and 100% focused on the execution of our strategic plan," he wrote.