Proxy advisors Glass-Lewis and Egan-Jones recommend that investors side with activist investor Bill Ackman in his proxy battle with Automatic Data Processing (ADP).
Ackman, the CEO of $11 billion Pershing Square Capital Management, is currently waging a proxy contest against ADP to get three new directors on the board, including himself. In his lengthy analysis, he characterized ADP as “one of the least efficient big companies.” That said, he sees an opportunity to run the business much more effectively and efficiently. He believes this is a situation where the company is “vastly underperforming its potential.”
One thing that stood out to the Pershing Square team was how the company compares to Paychex (PAYX), a competitor in the human capital management (HCM) business.
“If you look at Paychex, over the last six years, Paychex has gotten more and more profitable and productive,” Ackman told Yahoo Finance in a recent interview. “Their margins are up to 41% versus ADP’s on a like for like basis — ADP’s core employer services business is at a 19% margin — so basically less than half a direct competitor for a big part of ADP’s business. And we said, ‘Wow, this doesn’t make lot of sense.’”
ADP’s CEO Carlos Rodriguez ardently disagrees with Ackman. But Glass Lewis thinks he makes a fair point.
“Upon our review of the catalog of materials publicly disclosed during this campaign, and after engaging with each party separately, Glass Lewis finds validity in Pershing Square’s overall thesis and we have determined that a sufficient basis exists to support the Dissident’s solicitation for minority representation on the ADP board,” Glass Lewis wrote in a proxy paper published on Monday.
ADP also agrees with Ackman’s contention that ADP investment return under Rodriguez isn’t as robust as the company claims. In a recent letter to shareholders, ADP pointed to its total shareholder return during Rodriguez’s tenure being north of 200%. Ackman argues that the return doesn’t fairly capture how poorly the company has actually performed during the period. Specifically, he contends that ADP overstated its total shareholder return during Rodriguez’s tenure as CEO by just over 60 percentage points.
“In particular, compelling evidence indicates that ADP is underperforming its potential, resulting in lower returns for investors than would otherwise be expected to accrue to ADP shareholders given the Company’s leading market position and competitive advantages,” Glass Lewis’s proxy paper said. “Further, upon closer scrutiny and framed in proper context, we find that ADP’s recent returns and operational performance are not as strong as the Company claims. More notably, ADP’s decelerated growth and relative inefficiencies have allowed competitors to take valuable business share and position themselves to generate superior profit margins and returns at the expense of ADP and its shareholders.”
ADP continues to push back on Ackman’s and Pershing Square’s ideas. Company management recently characterized Pershing Square’s views as “extreme and ever-changing” and said that it “would put the business at risk.”
“We strongly disagree with Glass Lewis’ recommendation, which does not take into account the significant business risk inherent in Pershing Square’s margin expansion target nor the negative impact it would have on client retention and ADP’s overall business,” ADP said in a statement. “After thoroughly reviewing Pershing Square’s nominees’ credentials, ADP’s Board determined that none has relevant technology or Human Capital Management experience and all lack skills and experience that would be additive to our Board.”
Egan Jones also sides with Ackman
In a recent interview with CNBC, ADP’s CEO went as far as to call Ackman a “spoiled brat.”
“I didn’t take it personally,” Ackman told Yahoo Finance.
At the time, proxy advisor Egan Jones came to Ackman’s defense. Egan Jones’ Kevin McManus wrote that Rodriguez’s hostility toward Ackman “highlights the lack of shareholder input into running and growing the company.”
“A CEO must always recognize that they serve at the pleasure of the board and the shareholders,” McManus wrote, according to Institutional Investor.
Glass Lewis believes that to “effect meaningful change” in ADP’s culture, it may be necessary to support Pershing Square’s entire slate of nominees.
On Monday afternoon, Egan-Jones urged shareholders to side with Ackman.
“After looking at the arguments of both sides we are compelled to support Pershing Square’s set of nominees because in our view, ADP’s complacency resulted to the Board and management’s failure to acknowledge the Company’s underperformance in the recent years. In our view, Pershing Square’s presentation of the indicators of operational inefficiency is a credible ground why change is warranted in the Board room,” Egan-Jones’ Kevin McManus wrote.
Egan-Jones went on to highlight that ADP’s labor productivity is 28% below its competitors and that there’s “probably corporate bloat and inefficiency” and that the company lack “efficient innovation and technology initiatives.”
In addition to Ackman, Pershing Square has put forth Veronica Hagen and Paul Unruh as nominees. The proxy advisor encourages shareholders to vote for Ackman’s “gold card” instead of ADP’s “white card” in the proxy contest.
Ackman’s Pershing Square owns 8.3% of ADP. It’s the hedge fund’s largest position.
Julia La Roche is a finance reporter at Yahoo Finance. Follow her on Twitter.
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