Wednesday, May 13, 2009

Ackman goes to town on Target

On Monday, William Ackman, president of hedge fund Pershing Square, held a "town meeting" in Manhattan and broadcast on the Internet to present his case to shareholders of Target and encourage them to elect new directors that he called more experienced and more independent than current members of Target's board who are up for reelection.

In his hour-long presentation, Ackman says that Target does not have the proper structure for its credit card operation and that the company should offload the credit risk to a bank or other financial institution. He also notes that among retailers, Target owns the most real estate and claims that the company has several options to monetize its real estate assets. Third, he points out that Target missed the boat on grocery sales and, as a result, cannot challenge Wal Mart in that category. The directors endorsed by Ackman has extensive operating experience in those three key disciplines.

What's innovative here is Ackman's use of the town hall format. The meeting was open to anyone interested and during Q&A questions were fielded from the audience and from those viewing the webcast. This degree of transparency is fairly unique in the realm of proxy fights and marks a continuation of Ackman's earlier pledge to be more public about issues facing his business and the hedge fund industry.

From a communications perspective, Ackman dedicated part of his presentation to systematically countering recent claims Target has made against him. He also took pains to praise Target's management and positioning his beef with the board as one focused on independence and receptivity to new ideas intended to enhance shareholder value. Most noteworthy, he was clear that shareholders have a choice among directors and that voting for one or more of those endorsed by Pershing Square does not require them to vote for Ackman himself, who is also on the alternative slate.

In all, it was an effective presentation of a business argument and the event went a long way to refuting Target's claim that this proxy fight is all about Ackman and his fund's short term interests.

Update: In a move that The New York Times calls "unusual tactic in proxy fights, but one the company feels it must make in order to win over shareholders," Target is fighting back by issueing its own presentation that tries to discredit the nominees supported by Pershing Square.

Friday, May 8, 2009

Hedge funds need a community organizer

"Hedge funds really need a community organizer," quips Clifford Asness, managing partner at AQR Capital Managment, in a strongly-worded letter rebuking the administration's comments about secured investors opposing the reorganization plan for Chrysler. When asked about the 16 or so bondholders who were not willing to accept the government's terms President Obama said, “I don’t stand with those who held out when everyone else is making sacrifices.” Mr. Asness, rightly, tries to set the record straight.

Certainly there are plenty of targets for bondholder ire in the Chrysler case -- even for funds, like AQR, that are not invested. The sanctity of contracts, the government intrusion in the economy, the package offered to the UAW, the merits of bankruptcy court are all at issue here. However, the size of the auto companies and their historical importance to the econmy make it easy to tar as un-American those who would see Chrysler in bankruptcy.

In the economic crisis, there is a broad perception that, as the President suggests, we are all in this together and we need solutions that require cooperation from all parts of society and business. This puts Chrysler's dissident bondholders in the same uneviable position as those investors who oppose restructuring mortgages because of ripple effects into the bond market. The complexity involved in both of these situations and Main Street's lack of understanding of the rules of bankruptcy and the financial system in general contribute to the reputational risks associated with taking a principled but massively unpopular stand on hot-button issues like automakers and mortgages.

Of the Chrysler holdouts, The New York Times writes, "this bit of brinkmanship — which many characterized as a game of chicken with Washington — has become yet another public relations disaster for Wall Street...What is striking to many in financial circles is how much Chrysler’s reluctant creditors gambled for what is, in the scheme of this bankruptcy, a relatively small amount of money."

Yes hedge funds need a community organizer. Job one would be to unify the industry and develop a sense of, well, community based on shared business interests. Job two would be to become more effective at advocating common sense on critical issues facing hedge funds' ability to operate freely in the marketplace. Job three would be to know which fights, like Chrysler, cannot be won.