Pershing Square Capital Management’s Bill Ackman recently sent out his quarterly letter to the hedge fund firm’s investors. Over the first quarter of 2009, his funds all managed to post positive gains net of fees, handily outperforming the S&P 500 and DOW, which were down 11% and 12.4%, respectively.
Despite, the positive performance, most investors were likely to have been most interested in hearing Mr. Ackman’s thoughts on his failed proxy battle against Target Corporation (NYSE:TGT
). Among the many reasons for his proxy battle, it is increasingly apparent he was mainly displeased with Target’s risk exposure in its credit card operations and the board’s lack of accountability and responsiveness in Target’s recent “undervaluation.” Although the proxy battle was lost, Ackman remains optimistic, commenting:
While the principal objective of the Target proxy contest was to maximize the value of our investment in Target, we believe the follow-on impact of the contest will lead to board governance improvements at other companies as boards examine their practices to determine whether they are at risk to shareholder scrutiny and potential future challenges.
The advantage of the proxy battle, then, is three-fold: increased scrutiny in credit practices, share price increases due to increased media attention, and increased transparency. Ackman believes his efforts over the first quarter of 2009 were not in vain.
Aside from Target, Ackman thinks that the future is bright for shareholder activist strategies. Taking into account decreased competition from the winding down of many funds, he also believes there to be “…a wide spread between price and value…Judged by these standards, the ingredients for profitable shareholder activism are more present than ever before, and we continue to be highly capable of implementation.” As a precaution, however, Pershing has moved to hedge their holdings in Target due to their “inability to accurately forecast with confidence the duration and depth of the current recessionary environment.”
With regards to other investments in Pershing Square’s portfolio, Ackman believes the management change at Borders Group Inc. (BGP) is significant enough to help provide a positive investment for his 40% shares outstanding in the bookstore from a $42.5 Million loan. His predictions are not that far off, with Borders stock trading up 985% due to increased margins and stabilizing book sales at the time of the penning of the quarterly shareholder letter.
As for the nation’s second leading mall owner in the US, Growth General Properties (NYSE:GGP
), Ackman believes there to be significant upside potential for the company. After purchasing a 25% stake in Growth General and providing $375 Million in debtor-in-possession financing, Pershing Square has effectively hedged their position to the point of “almost no downside risk.” Ackman was unable to comment further due to legality issues as a serving member of the GGP board.
Pershing Square also sold their holdings in Wendy’s (NYSE:WEN
), Visa (NYSE:V
), and the Dr. Pepper Snapple Group (NYSE:DPS
) as a means of freeing up liquidity in order to pursue “more attractive valuations” and employ more conservative valuation analysis in light of increased market volatility. The firm has also moved to wind down their hedge positions in Collateralized Debt Securities, as some of the risk of further global financial crisis has “abated.”
Disclosure: No positions