More on Ackman / Target

Am I missing something here? After reading the headlines Wednesday one would believe Bill Ackman reduced his ownership stake in Target (TGT). I don't see it. Let's look...

Here is the applicable portion of his SEC filing:

Item 4 of the Schedule 13D is hereby supplemented as follows:
As of May 26, 2009, the date of the last amendment to this Schedule 13D, the Reporting Persons beneficially owned approximately 7.8% of the then outstanding shares of Common Stock, consisting of 3.3% in shares of Common Stock and 4.5% in stock-settled call options. As a result of the transactions reported in this Amendment No. 9, the Reporting Persons sold options and engaged in net purchases of shares of Common Stock, resulting in a net increase of Common Stock ownership of 0.2% and a decrease of beneficial ownership to 4.4%, consisting of 3.5% in shares of Common Stock and 0.9% in stock-settled call options.

Item 5. Interests in Securities of the Issuer.
(a), (b) Based upon the Issuer’s quarterly report on Form 10-Q for the quarterly period ended May 2, 2009, there were 752,279,589 shares of Common Stock outstanding as of June 3, 2009. Based on the foregoing, 32,994,586 shares of Common Stock (which includes Common Stock and physically-settled listed and over-the-counter American-style call options), representing 4.4% of the shares of Common Stock issued and outstanding, are reported on this Amendment No. 9.
As of the date hereof, none of the Reporting Persons owns any shares of the Common Stock other than as reported herein.

So, what seems to be the issue is the type of ownership he had/has.

To help put this into context we need to look at Target's case against him in this spring's proxy battle:

Target made apparently a compelling (I say so because he lost the proxy battle, not because I believe it) case that since much of Ackman's ownership consisted on "call options", that he truly was not a long term investor.

The options are not "ownership" per se but an interest in the outcome of the stock price. Because of that the interest in those shares cannot be voted and it was this structure that Target harped on to diminish Ackman's plans as "short term". The options mentioned above were stock settled. So, he did not sell them for cash but essentially converted them to stock.

Based on this, while the % of shares he holds an interest of some sort in has fallen, his monetary interest probably is not all that unchanged or likely has risen. Look at this example. I buy 2 $40 call options for Target and pay $100 each for them. I have an economic interest in 200 shares (each option =100 shares) but ownership of none. Then, at expiration, I convert 1 of the 2 options into shares. The cost of doing that would be $4000 for the stock based on the price of it. In this case, the "economic interest" I have based on the number of shares in the stock has fallen but my monetary interest has risen, considerably.

So, in Ackman's case, if he intends on making another run at the board next year, what matters more than anything is not the total economic interest he has through swaps/options/ownership but simply his outright ownership of shares. That structure will eliminate the argument from management and bolster the ideas he has for the company. For this reason, if he eliminated all the option and swap contracts he has and simply owned 3.5% to 4% of the common shares, based on recent results, this would be a more meaningful position in the company in the eyes of shareholders vs the 7.7% he had through the above mentioned agreements.

Because of this the headlines out to have been "Ackman Increases Target Ownership" as Pershing had a "net increase" in shares directly held.

Disclosure ("none" means no position):None

Comments

[HardwoodFlo...:]

Todd thanks for following this since my last post:

" love the idea that Ackman is circling back at the REIT concept. What bank is going to underwrite a "reach-around" (a.k.a sale lease back) right now? Ackman, have some grace and class. I guess since crying and acting like an absolute child at the shareholders meeting he figures- “well I already ruined my reputation and career so what the hell might as well keep poking Target.

Target needs to hire the best lawyer in the world and just keep kicking this ass all the way back to Cambridge. He's such a classic HBS wanker. What the hell do they teach people at HBS anyway- I mean don't they learn to cut bait, trim their losses and move on to the next deal. Ackman is such a jerk he turned dollars in to pennies on the Target deal. Lost billions. What a loser. "

I've been doing some thinking. i think it would be good for Ackman to sit his punk-ass down on the BOD of TRT. Here's why on that Board are some really amazing people like Bill George- who built Medtronic from nothing. It would be good for this loser, Hardvard Business School wanker, to know the history of Target a company founded by and run by people with values and beliefs (for example a code of civic responsibility that gives back 10% to the communities in which they operate). They guy has no idea what Target has accomplished, how well run it is (and it is), all he sees is a "reach-around" (sale Lease back) which sure put's money into shareholders hand 1 time but saddles the company with long-term leases and obligations it currently doesn't have. Sale lease backs are great for private companies that want some liquidity or what ever but for a public company it sucks for the long term shareholder. Somebody kick this guy back to preschool.

What has Ackman ever done in his life? I mean I read his bio in Portfolio magazine and his chief accomplishment seemed to be tricking his roommate into taking the room that he didn’t want! What an ass. That was what he learned at HBS. HBS should be ashamed of itself for having nurtured this loser.

So in sum, put him on the board so he can grow up and be a man some day.

Aug 14 01:54 PM

[User 183867:]

Todd, your argument is internally inconsistent. You imply it doesn't matter whether his beneficial interest consists of common or options and then when he lowers his beneficial interest but increases the common component of the interest, you say he took up his stake. This logic is very shaky.

Agree with the previous poster -- Bill Ackman's idea works fine in a spreadsheet, but sucks in the real world. Taking a pristine property portfolio and levering it up to gain a tax shield might be a fine exercise for a summer associate willing to show you his Excel skills, but in the real world it imposes a strain on the company's credit, which can completely wipe out the benefits of the tax shield in a higher cost of equity and total capital. It is a bad idea.

Aug 15 08:49 AM