ADP/PG Proxy War
Welcome to Proxy War season! If you elected to have proxy forms and annual reports mailed to you, by now you’ve likely received the annual report and proxy form for ADP. Within the mailing, you’ll find an insert trumpeting ADP’s successes and asking that you vote for their board slate on the “white” proxy form. The company is going to these lengths because an activist investor group will soon be sending out a “gold” proxy form advocating for their own board directors. This activist group is called Pershing Square, and it has nothing to do with Pershing, the custodian. The vote will be tallied at the annual meeting on November 7.
Obviously, your vote is yours to make. We are often asked by our customers how they should vote in situations like this. In this case, we will be voting with ADP management. They have done a phenomenal job of growing through thick and thin, with little risk. Frankly, ADP is about the last company we would have expected to be a target for an activist investor, which usually takes on companies which are stumbling around and are undervalued. If anything, ADP has been a little overvalued for awhile, so we really haven’t been buying it recently. The stock is up 146% from its last cycle peak in 2007, whereas the S&P 500 is +60%. It outperformed the S&P 500 in 2016, 2015, 2014, and 2013. The company has been actively managing their business by divesting two major divisions in the last 10 years. Does that sound like a bumbling company to you?
Bill Ackman of Pershing Square has no new credible plans to change the company. Generally, the modus operandi of activists is to buy a big stake in a stock, announce that they have done so, then lob threats at the company, saying they will wage a proxy war unless their demands are met. These demands typically follow a pattern of: allow the activist a seat on the board, advocate for breaking the company into pieces, and launch a major cost-cutting program. Activists would like to make a quick buck and move onto their next target, even if to the long-term detriment of the company they’ve targeted.
Sometimes this is actually needed, but not with ADP. When Procter & Gamble became the target of activist Trian Partners, we considered their proposal. P&G has been stumbling for many years, although the company’s missteps have been overshadowed by unfortunate external competitive threats. Trian’s Nelson Peltz referred to a “suffocating bureaucracy” at P&G, and he probably has a decent point. He also does an admirable job of laying out all the pressures P&G has faced. But we ultimately decided to side with management, if only because we are not big fans of activists for their focus on the short-term rather than the long-term.
Representatives of P&G and Trian have been not only mailing shareholders, but calling them as well. We would guess that this will happen with the ADP proxy war as well. Just remember that you only need to vote one proxy form, and don’t feel bad if you don’t want to talk to the people calling for your vote.