Wednesday, June 10, 2009

Ackman to media: Screw you guys, I am going home!

Seven months after announcing that he was going to become more visible via the media, William Ackman is going home. In November, Ackman told investors that he decided to engage with the media, in part, because "it is important for the hedge fund industry to come out of the shadows and defend the importance of our work." Now, in his most recent letter to investors, he writes, "you should expect that we will do our best to fade into the sunset as far as the media is concerned until such time as an investment opportunity requires us to work more closely with the press. We hope such time is many moons from now."

In Cartman's words, screw you guys, I'm going home.

What happened? Ackman waged a very public and expensive proxy fight against Target and lost. A media program designed to build support for electing new directors to the Target's board included appearances on CNBC and an open town hall meeting. It didn't work. At the Target shareholder meeting last month, neither Ackman nor any of his other nominees were elected.

What's worse is that Ackman took some lumps in the media. Most notably, a column in the New York Times, questioned Pershing Square's motivation and tactics.

Here's some friendly advice for Mr. Ackman and other shareholder activists:

You need a thick skin. Publicity invites criticism and the motivation of hedge funds are always going to be questioned. That said, if the straw that broke the camel's back was indeed the critical column in the New York Times, it would be a shame. The column appeared after the shareholder vote and the writer had the benefit of hindsight to dissect Pershing Square's argument. As such, it is not as much of an indictment of the fund's approach as it might have been had the column appeared before the vote. Mr. Ackman did not see it that way and felt compelled to issue a long rebuttal. This was a mistake. Activists need a thick skin and be prepared for criticism. When the record needs correcting, it has to be done in a more selective and efficient way.

Understand the risks. Pershing Square needed to understand that most shareholders did not feel that Target was a company in trouble and in need of a shakeup (Target was trading at about $40 per share in early November and is still at that level). Moreover, the core of Pershing Square's campaign hinged on non-operating fixes for Target (selling off its real estate and its credit card operation). It was too easy for the company to paint these strategies as "financial engineering" that had nothing to do with the retail business. Pershing appears to have underestimated the difficulty in changing the prevailing sentiment among Target shareholders:"if it ain't broke, don't fix it."

Nice guys finish last. In Ackman's own words, when it comes to activism "thoughtful and constructive engagement based on careful and detailed analysis focused on shareholder value creation will always, in our opinion, be an effective means to maximize value in the public markets." Maybe not. Throughout its campaign, Pershing Square took pains to be non-adversarial. It praised management and even Target's board. It encouraged "exploration" of options like selling the real estate assets. Curiously, more tangible strategies, like getting Target into the grocery business, as Wal Mart has done, were never at the forefront of the campaign. Overall, this fight needed a much sharper edge to compell shareholders to vote with Pershing Square.

I encourage Mr. Ackman to rethink his decision to withdraw from the public debate about hedge funds, activism and even the business prospects for Target. His next activist situation will require engaging with the media and the steps he takes between now and then can affect the how his argument will be perceived by the market.

He had it right in November when he wrote "if we and others (that includes hedge fund investors in addition to the managers) don’t do so [engage in the public debate via the media], the industry, in my view, is at even greater risk of further regulatory, tax, and other legal changes that will materially harm our business models and industry."

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