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Critical Thinking

In JC Penney Boardroom Brawl, Ackman Is the Bully

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When Bill Ackman of Pershing Square Capital Management bought 18% of JC Penney (NYSE:JCP) and negotiated a seat on the board, he essentially started calling the shots at the troubled retailer. The activist investor championed a controversial move to replace long-time CEO Mike Ullman with Apple’s retail executive, Ron Johnson.

At the time, Ackman said JC Penney “isn’t fundamentally broken” and he’d found the “best guy to run the company.” He praised Johnson’s new ideas for transforming the brand and said “Ron Johnson’s record of retailing success makes him the ideal leader to fix JCP.”

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Above all, Ackman sounded supremely confident in his investment and his decisions.

Less than a year later, the only turnaround in sight was Ackman, who said his hand-picked savior had made “big mistakes” in his efforts to turn around the company and that the impact had been “very close to disaster.” Just a few days later, Johnson was out and Ullman was back at the helm.

Of all the things that Ackman has been wrong about since investing in JC Penney, the most glaring are:

1) Hanging those “big mistakes” on Johnson. Ackman deserves at least half the blame for hiring the wrong guy and giving him the rope to more or less decimate the company’s organization, its stores, and is business model.

2) Using the phrase “very close to disaster.” There was nothing close about it. In a very short time, Johnson somehow managed to destroy the trust of what was left of the company’s retail customers and employees.

Now, having sparked a brutal and surprisingly public boardroom battle, Ackman is rattling investors and, far more importantly, distracting JC Penney’s leadership team at a time when it needs to be laser-focused on stabilizing the fractured company.

Make no mistake. If Ackman was actually right about one thing – that JC Penny wasn’t “fundamentally broken” when he and Johnson took control – it most certainly is broken now.

Johnson essentially bet the company on a risky concept – that the same retail strategy he used at Apple (NASDAQ:AAPL) would work to upscale a clothing company. He gutted JC Penney from top to bottom in a massive restructuring and reorganization of its executive team, middle management, retail stores, inventory, and promotional strategy.

The results were absolutely disastrous. As customers abandoned the store in droves, revenues plummeted, losses piled up, and cash dwindled. Finally the company’s board, led by chairman and former Texas Instruments (NYSE:TXN) CEO Tom Engibous, pulled the plug and brought back Ullman to try to fix the mess created by Ackman and Johnson.

Now Ackman claims in long letters to the press that the board has cut out of the loop. That he’s not being given a chance to vet and approve new executive hires. That executives he liked have been terminated. That Ullman is making decisions an interim chief executive shouldn’t be making. And that the board hasn’t been aggressive enough in its CEO search process.

Maybe I’m reading this wrong, but Ackman seems to think that the board not listening to him is a sign that it’s ceased to function properly. He says he has lost confidence in Engibous and wants to bring the company’s former CEO, Allen Questrom, back to replace him as chairman. And that’s why he’s been forced to air his grievances to the media and everyone else.

Want to know what I think? In an interview on Friday, Starbucks (NASDAQ:SBUX) CEO Howard Schultz had this to say about the situation:

“The irony is Bill Ackman has the blood on his hands for being the architect and recruiter of Ron Johnson, and of the strategy. Mike Ullman came back to try and save that company. He is the kind of leader that will rebuild the trust with employees, and if given time, turn things around.

“And what’s so wrong is that Bill Ackman has been destroying the company. If I was sitting on that board, I would be asking for Bill Ackman’s removal. Bill Ackman has fractured the trust within that board. Watching what went on today, I find it disgusting.”

I couldn’t agree more. Moreover, I would say that JC Penney’s situation is more precarious than a turnaround. Revenues are at their lowest in a quarter century and still sliding. It continues to lose customers and bleed red ink. It needs to be stabilized. For better or worse, the board chose Ullman to do that.

And Ackman’s public display of what can only be characterized as a temper tantrum is hindering that delicate process. 

If Ullman, Engibous, and JC Penney’s board have indeed cut Ackman out of the loop, I don’t blame them one bit. I would have done the same thing. The last thing this company needs is to be distracted by what appears to be a micromanaging and controlling agitator.

Ackman may be a billionaire hedge fund manager who owns 18% of JC Penney, but 82% of it is owned by others. This is a public company with more than 100,000 employees, a thousand stores, a lot of shareholders, and most importantly, loads of customers still heading for the exits courtesy of the activist investor. Ackman had his chance and blew it. He doesn’t get a second bite of the apple. His first was a disaster.

What do you think?

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