For Airgas founder, time to savor rival's hedge fund headache

For Airgas Inc founder and Chairman Peter McCausland, there was a fair amount of schadenfreude in the air on Wednesday.

McCausland, 62, fought a bitter and eventually successful battle for 13 months to keep Airgas independent in the face of a hostile bid from Air Products and Chemicals Inc.

Now the hunter may become the hunted, with news that hedge fund manager William Ackman has taken a nearly 10 percent stake in Air Products. His former nemesis, Air Products CEO John McGlade, is signaling he is prepared to use the kinds of tactics McCausland used to defend his company against Ackman.

"There is a fair amount of irony in this," McCausland said in a telephone interview on Wednesday. "I don't really know what Mr. Ackman's plans are, but I think it'll be interesting to see how much the Air Products management enjoys dealing with the arbitrageurs who come into the stock at times like these."

Airgas successfully fended off Air Products in 2011 after a bruising battle that consumed Wall Street and drew massive attention from hedge funds and arbitrageurs, who bet heavily on the outcome of merger and acquisition deals.

Ackman said on Wednesday he has spent $2.2 billion on a 9.8 percent stake in Air Products. While Ackman's stake is his largest yet in a public company, it is unclear what his suggestions will be to unlock more value from Air Products.

Ackman, who has also amassed a large stake in JCPenney and is shorting shares of Herbalife, said he considers Air Products "undervalued" and an "attractive investment."

Air Products said in a statement that it has not been in touch with Ackman but looks forward to talking with him to understand his views.

Airgas has seen quarterly net income rise 13 percent to $84.7 million since it fended off Air Products, helped largely by sales of gases to manufacturers and U.S.-based shale oil drillers.

Air Products began aggressively stalking Airgas in February 2010, sweetening its bid several times, but drawing the line at $70 per share, considering the offer lucrative given that Airgas shares traded around $48 per share just before the bid was announced.

McCausland dug in, saying the 2008 recession had temporarily crippled his company and vowing not to sell at what he considered a low price. He organized a shareholder defense plan, commonly known as a "poison pill," which, if used, massively increases a company's float, making a buyout nearly impossible.

"We were never against a sale of the company," McCausland said. "We were against a steal of the company, which Air Products tried to do."

A Delaware court judge upheld Airgas's use of the poison pill in early 2011 and Air Products dropped its bid. Airgas shares have jumped 61 percent since the bid was dropped, and are now trading above $100, validating McCausland's stubbornness during the buyout fiasco. Air Products shares are up 14 percent in the same time period.

"Air Products didn't like our poison pill and they didn't like our staggered board," said McCausland, who stepped down as Airgas CEO last year and is the company's largest shareholder. "Air Products might find those two things quite useful in the days and months ahead."

The stake comes a week after Air Products instituted its own poison pill, saying it had detected "unusual and substantial" interest in its shares. A poison pill is meant to give a board of directors time to find alternatives to any proposed takeover bid and explain to shareholders why a hostile bid is inadequate.

Poison pills have been criticized as a way for management to entrench itself at the expense of shareholders, who are prevented from accepting the offer in a direct vote. Indeed, Air Products argued as such during its takeover bid for Airgas, saying shareholders should have a right to directly vote on its bid.

By using the poison pill defense now against Ackman or another would-be acquirer, Air Products is following an Airgas strategy it initially fought, and lost, to have invalidated by the Delaware Chancery Court.

"That court's decisions made clear that the rights plan was a reasonable and appropriate tool available to boards," said Air Products spokesman George Noon. "If we had to live by that ruling then, then we are living by that ruling now."

The court's decision means Air Products can keep its poison pill indefinitely. Ackman or any other interested party would have to wait some time to change management or other parts of the company.

Poison pills do not have a set expiration date, Delaware's Chancery Court Judge William Chandler wrote in his 2011 ruling for Airgas.

McCausland said Airgas might have interest in some parts of Air Products, but said he has no interest in pursuing a bid for the whole company.

"It'll be incumbent upon Air Products to show that they have a better strategic plan that can create more value than what Bill Ackman might propose," said McCausland.