ADP Vote to Offer a Status Check on Standing of Activist Investor Ackman

By David Benoit and Juliet Chung Features Dow Jones Newswires

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.

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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.

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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)