ADP Falls While Ackman Says Stock Could Double by 2021
Activist investor Bill Ackman said Automatic Data Processing Inc.’s “buy not build” strategy has riddled the company with inefficiencies that, if fixed, could more than double the value of the company within four years. Investors sent the stock lower.
The stock could rise to $221 to $255 by June 2021 and return as much as 132 percent to shareholders, Ackman said in a presentation Thursday. Shares fell 5 percent to $105.52 as of 12:49 p.m. in New York.
The billionaire said he’s received a hostile reaction from the company and skepticism from analysts about his push for changes at the human-resource and payroll outsourcer. ADP has said it’s returned 202 percent to shareholders since Chief Executive Officer Carlos Rodriguez took over in 2011.
“The question is why has the market and why has the board not recognized the problem,” Ackman said. “The answer to the question is the company has done a pretty good job hiding the problem, and that relates to complex accounting and reductions in disclosure over time.”
ADP largely remains a traditional payroll company that has tacked on a series of acquisitions to grow into new software offerings, Ackman said. That “buy not build” strategy has led to inefficiencies because ADP has failed to fully integrate the new businesses, he said. It’s also led to a lack of innovation and slower uptake on new products from its clients, Ackman added. ADP should either upgrade or replace its back-end infrastructure to improve its efficiency, he said.
The activist said the company would likely need a new CEO to push through the changes.
A representative for Roseland, New Jersey-based ADP didn’t have an immediate comment.
“If I didn’t know better, I’d think he was making the short case — slowing growth, increasing competition, overstated numbers, uncreative management,” Robert Chapman, fund manager at Chapman Capital, said in an email. He has a short position on ADP’s stock.
Commentary: Ackman Is Long ADP, But You Wouldn’t Know It
Pershing Square Capital Management, Ackman’s investment firm, disclosed an 8.3 percent stake in ADP on Aug. 7 and is seeking three board seats, including one for Ackman. The two sides are expected to meet in early September after ADP vets Ackman’s director nominees.
Ackman said he faced similar skepticism at Canadian Pacific Railway Ltd. in 2012, when the company said it was absurd that it could double its margins.
“They hired a consultant that said the laws of physics wouldn’t allow us to increase margins at Canadian Pacific from 19 to anything close to our 35 percent estimate,” he said.
Canadian Pacific reported an earnings before interest, taxes, depreciation and amortization margin of 51 percent as of June 30. Pershing Square made $2.6 billion on its investment in the Canadian railroad.
ADP’s failure to address acquisition and efficiency issues has allowed competitors, including Paychex Inc. and Paycom Software Inc., to gain market share from ADP, Ackman said Thursday. The company should consider buying one of its smaller rivals to accelerate changes, he said, though its culture would need to change for it to be integrated properly.
The activist investor said the 20-year average tenure of senior management has created an insular culture at ADP. The company should be recruiting from Silicon Valley firms like Google so that it can be more innovative, Ackman said.
ADP, which handles the paychecks of 26 million U.S. workers, has so far resisted Pershing Square’s demands. The company said Ackman originally wanted five seats on the company’s 10-member board, a proposal the company said it rejected along with possibly replacing CEO Rodriguez. ADP said in a statement last week that it would review Ackman’s revised slate of nominees and their ability to add value to the board.
Rodriguez, in an Aug. 10 interview on CNBC, likened Ackman to a “used-car salesman” and compared his request to extend the nomination deadline to a “spoiled brat” asking a teacher for more time to complete an assignment.