Why Ackman's Got Beef with Target

Barron’s writer Andrew Bary gave voice to a question that is probably on many analysts’ and investors’ minds…what exactly is Bill Ackman’s beef with Target (TGT)? The company has done just about everything right. Pershing Square’s Ackman is basically barking up the wrong tree and I think I know why. He’s painted himself into a corner.

From "Campaign Off-Target" (Barron’s):

Target is under attack by an activist investor who has lost his shirt, and his clients’, in a hedge fund that bet the wrong way on the direction of the company’s shares. Bill Ackman, head of Pershing Square Capital Management, launched the unusual single-stock fund, Pershing Square IV, in 2007, investing $2 billion only in Target call options and other derivatives. The fund lost 90% of that money as Target’s shares plummeted 50%, to 31 earlier this year. The fund has recovered somewhat since then, as the shares have rebounded to 41, but it remains down about 80% since inception.

The rest of the article goes on to detail how much better Target has done than almost all competitors, how well they’ve navigated the recession thus far and how uninspired the rest of TGT’s investors are by this proxy contest, which will be resolved later this week. Management also publicly scoffs at Ackman’s contention that Target selling off its real estate portfolio or spinning it into a REIT will add value. They view this whole thing as a distraction, and they are probably right.

Why then is Pershing Square pursuing this multi-million dollar waste of time? The answer is simple: they have no choice. When you launch a “single-stock" fund, there is basically no turning back without admitting you are wrong. Guys at Ackman’s level do not make such admissions, even under pain of water-boarding.

His problem here is the whole “sell the real estate, lease back the stores’ space, unlock the property value” thing. That concept is so 2005. Many companies (especially retailers) have played this game at the behest of activist shareholders like Ackman and I can’t think of very many success stories.

I can think of some high-profile failures, like bankrupt Six Flags, which pursued the land-selling strategy at the behest of activists who eventually took the company over, including Dan Snyder (Redskins Owner) and his puppet CEO (Mark Shapiro from ESPN). They sold a bunch of land, licensed the Six Flags name and logo to sell water guns in Wal-Mart (WMT) and pretended to be doing something about the gangs in the parks, but at the end of the day, the strategy failed. With a distressed company like Six Flags, real estate value being unlocked would not fix a broken business.

In the case of Target, real estate is not holding the company back at all. It’s 2009, and Ackman’s 2007 vintage fund concept is played out. The best thing that can happen to him is a defeat for the board seat he seeks with his 3% stake so he can walk away “having tried his best”. I predict his loss and subsequent liquidation of the Target-only fund within a month or so.

Ackman is talented and Pershing Square has a good track record; as a fan of activism in general, I think Bill’s wasting his time on this one, as do most other spectators. Move on, Pershing Square. Target’s not a worthy target.

Disclosure: I am not long or short shares of TGT. Do not trade based on anything I write on this site.

Comments

[bfras921:]

i think if you own 3 % you should get a seat on the board

May 26 07:59 AM

[Joshua Morg...:]

My follow up after Ackman's CNBC interview:

thereformedbroker.com/.../

May 26 08:17 AM

[HardwoodFlo...:]

Ackman wants to push a "reach around" (aka Sale Lease Back) on the real estate for what purpose? No doubt so that some dubious REIT could benefit from what Target already owns. While a Reach Around can be good for a company to get some quick cash it isn't good for the long term health of the company. It works well with private firms, where the Reach Around benefits the owner, but under this scenario the operating company would be obligated to some unknown entity not necessarily the current shareholders of Target.

Ackman's whole thing already is getting annoying. Business is not some theory that some geek like Ackman derives from B-School. Target is an amazing company, that was created with a clear vision and operating platform. All Ackman is doing is clouding that vision and trying to pervert it to his own particular ends- not for the benefit of the company.

An activist shareholder should be out for the long term goals and vision of the company if he is not be an activist in another company. The business of Target is just that- the business of Target. This whole thing reminds me of the Private Equity guys who think they can run public companies better than the public companies themselves. The Hubris is staggering...put that pimpled faced Ackman in his place...Just because some jerk can raise a fund he thinks he can manage a business as big, diverse and unique as Target is insane. Flush him down the toilet, back to NYC...


Let's see this clown try and do something that adds true value to the world like start a business, manage it, create jobs and opportunities, expand that business and create some value. All he has done in his in this episode is diminish his investors value and distract a good company from it's day-to-day oeprations. What a loser.

May 26 04:59 PM