Post by jannikki on Feb 18, 2007 9:05:38 GMT -4
Ceridian on hedge-fund hot seat
Company is latest to face pressure from unhappy big-buck investors
BY JOHN WELBES
Pioneer Press
One Twin Cities-area company saw its stock price plunge 70 percent in the last year, expects a loss for 2006 and had to work with its lenders to avoid default.
The other is a profitable operation with growing revenue and a foothold in the expanding business of processing gift- and gas-card transactions.
But both recently faced shareholder revolts. In the case of the first company — Lenox Group Inc.—pressure for a shakeup came after investors had suffered several quarters of declining profits.
The case of the second, Ceridian Corp., is decidedly different.
A hedge fund, Pershing Square Capital Management, started buying up the stock of the Bloomington-based company in November. By January, Pershing was pressing for change, saying that the underperformance of Ceridian was dragging down the company's most profitable division, Comdata. Spinning off Comdata would create more value for shareholders, Pershing argued.
Then Pershing upped the ante by proposing to replace Ceridian's entire board of directors with its own slate of candidates. Pershing Square now holds 11 percent of the company's stock.
Ceridian said it would consider strategic alternatives, including a spinoff. On the company's earnings call last week, it named two well-known investment and legal advisers it had hired.
While a push from an investor for change isn't new, the battle heating up at Ceridian highlights the increasing influence of hedge funds, which are under pressure to produce short-term results.
There are more than 9,000 hedge funds in the country, with more than $1.4 trillion in assets. Those funds compete for high-end investors, who typically need at least $1 million to open an account. In return for high fees, their well-heeled investors expect better-than-average returns. So some hedge funds, like Pershing, are throwing their weight around.
Managers "should be under pressure from shareholders to make good decisions," said Alfred Marcus, a professor of strategic management at the University of Minnesota's Carlson School of Management.
But spinning off a business unit is ultimately a judgment that includes looking at the short and long-term consequences of such a move.
"There may be a good reason why management wants to keep the company together," he said.
Ceridian itself was spun off from the old Control Data Corp. in 1992.
Its core business remains human- resources outsourcing and benefits processing, which accounted for $1.1 billion of the company's $1.6 billion in revenue last year.
The company serves more than 20 million employees in the U.S. and also handles payrolls for 2.6 million Canadians every month.
Comdata became part of Ceridian in 1995. It issues and processes credit cards, debit cards, and stored-value cards, primarily to trucking firms and retail customers.
For the first nine months of 2006, Comdata accounted for 30 percent of Ceridian's revenue, but generated 65 percent of its operating profit.
Comdata also is seen by investors as having greater growth potential than Ceridian as a whole. Comdata has just 2 percent of the gas-card market for fleet trucks while a competitor, Wright Express, holds more than 8 percent, leaving more market share to capture.
Comdata also doesn't have much of a presence in retail gas outlets yet. An estimated 35 percent of gasoline purchases at retail sites are still done by cash or check.
That means there are a lot of consumers who haven't converted to paying at the pump, and Comdata could benefit when they do.
Pershing's moves put Ceridian's management under the microscope just as a new CEO is trying to put her stamp on the company.
Kathryn Marinello came to Ceridian in October from General Electric, where she had been president and CEO of GE's Fleet Services business. She had worked for First Data Corp., First Bank System and Citibank before joining GE in 1997.
Ceridian said that Marinello or others at the company would not comment for this story.
In a written response to Pershing on Jan. 22, Marinello revealed that the company had hired a financial adviser to consider options, and said that "our management team is and has been focused on improving our operations, meeting with our customers, strengthening the productivity of our sales force, and otherwise seeking to enhance Ceridian's performance."
The next day, Pershing proposed its own slate for the company's board of directors.
This isn't the first time that Pershing has turned up the heat on a company. The hedge fund began pressuring McDonald's Corp. to boost profits by selling underperforming assets in late 2005.
The restaurant chain eventually shed its Chipotle Mexican-food chain, though McDonald's management said Pershing's criticism did not prompt the move.
Pershing soon acquired an ally. Earlier this month, Relational Investors LLC, a San Diego-based investment firm, sent a letter to Ceridian saying it intended to vote for Pershing's slate of eight board candidates and agreed that Comdata should be spun off.
SEC filings show that Relational Investors started taking a position in Ceridian stock late in 2004, but the letter from principal Ralph Whitworth made clear his frustration that Marinello had not found time to meet with the firm.
Relational is no stranger to proxy battles. Earlier this month, Home Depot Co. announced that it had reached a deal with Relational, which owns 26.5 million shares of the home-improvement retailing giant, and had been agitating for more control of the company's board.
The firm settled for a board seat for one of its principals, David Batchelder.
Together, Pershing and Relational hold about 15 percent of Ceridian's shares. Still, winning a proxy fight could be difficult.
Other large holders of Ceridian shares, including Fidelity, Vanguard and Barclays, aren't known for rocking the boat in proxy fights, said Joe Barsky, a former American Express executive who now teaches portfolio management at the Carlson School. But you can never be certain how things will play out, he said. "It's like counting votes in Congress."
In the late 1980s and early 1990s, when public companies saw a similar type of dissatisfaction from investors, they often found themselves the target of a leveraged buyout.
"Typically these people came after poor-performing companies and larger companies," Marcus said, where the break-up value of selling off the pieces would be greater. Now even smaller companies like Ceridian can feel the heat.
"I'm not sure I'd want to be the CEO of a public company at the moment," Barsky said. "The demands are crazy. Everybody wants instant gratification."
In some cases, companies have tried to come up with a compromise that would satisfy activist investors.
But it's hard to think of a compromise when the demand is that a unit like Comdata be spun off, said Beth Young, a research associate with The Corporate Library, a research firm specializing in corporate governance.
Pershing's plan to replace Ceridian's entire board also might not go over well, Young said.
"It's hard to find eight good people to run, and eight people who aren't your employees and your business partners," she said.
"With more mainstream investors, this approach is a harder sell. It risks alienating other shareholders because it's so audacious. We've seen it happen and it has succeeded a couple of times, which is mind-boggling."
But Pershing might not have to take things that far to get a big return.
When Ceridian reported fourth-quarter earnings last week, the results were less lopsided, as profit margins for the human-resources division improved substantially.
The company said it expected the division to become more profitable in 2007, and that revenue for the whole company would grow 5 to 9 percent.
The stock soared to new highs, and on Friday closed up 38 percent since Pershing took its position in Ceridian. J.P. Morgan analyst Tien-tsin Huang wrote recently that the spike seems to assume that the changes Pershing wants are already priced into the stock.
"Either way, we believe the fire has been lit and the stock has moved, putting pressure on execution on all fronts," he wrote in a research report.
John Welbes can be reached at jwelbes@pioneerpress.com or 651-228-2175.
www.twincities.com/mld/twincities/business/16717509.htm
Company is latest to face pressure from unhappy big-buck investors
BY JOHN WELBES
Pioneer Press
One Twin Cities-area company saw its stock price plunge 70 percent in the last year, expects a loss for 2006 and had to work with its lenders to avoid default.
The other is a profitable operation with growing revenue and a foothold in the expanding business of processing gift- and gas-card transactions.
But both recently faced shareholder revolts. In the case of the first company — Lenox Group Inc.—pressure for a shakeup came after investors had suffered several quarters of declining profits.
The case of the second, Ceridian Corp., is decidedly different.
A hedge fund, Pershing Square Capital Management, started buying up the stock of the Bloomington-based company in November. By January, Pershing was pressing for change, saying that the underperformance of Ceridian was dragging down the company's most profitable division, Comdata. Spinning off Comdata would create more value for shareholders, Pershing argued.
Then Pershing upped the ante by proposing to replace Ceridian's entire board of directors with its own slate of candidates. Pershing Square now holds 11 percent of the company's stock.
Ceridian said it would consider strategic alternatives, including a spinoff. On the company's earnings call last week, it named two well-known investment and legal advisers it had hired.
While a push from an investor for change isn't new, the battle heating up at Ceridian highlights the increasing influence of hedge funds, which are under pressure to produce short-term results.
There are more than 9,000 hedge funds in the country, with more than $1.4 trillion in assets. Those funds compete for high-end investors, who typically need at least $1 million to open an account. In return for high fees, their well-heeled investors expect better-than-average returns. So some hedge funds, like Pershing, are throwing their weight around.
Managers "should be under pressure from shareholders to make good decisions," said Alfred Marcus, a professor of strategic management at the University of Minnesota's Carlson School of Management.
But spinning off a business unit is ultimately a judgment that includes looking at the short and long-term consequences of such a move.
"There may be a good reason why management wants to keep the company together," he said.
Ceridian itself was spun off from the old Control Data Corp. in 1992.
Its core business remains human- resources outsourcing and benefits processing, which accounted for $1.1 billion of the company's $1.6 billion in revenue last year.
The company serves more than 20 million employees in the U.S. and also handles payrolls for 2.6 million Canadians every month.
Comdata became part of Ceridian in 1995. It issues and processes credit cards, debit cards, and stored-value cards, primarily to trucking firms and retail customers.
For the first nine months of 2006, Comdata accounted for 30 percent of Ceridian's revenue, but generated 65 percent of its operating profit.
Comdata also is seen by investors as having greater growth potential than Ceridian as a whole. Comdata has just 2 percent of the gas-card market for fleet trucks while a competitor, Wright Express, holds more than 8 percent, leaving more market share to capture.
Comdata also doesn't have much of a presence in retail gas outlets yet. An estimated 35 percent of gasoline purchases at retail sites are still done by cash or check.
That means there are a lot of consumers who haven't converted to paying at the pump, and Comdata could benefit when they do.
Pershing's moves put Ceridian's management under the microscope just as a new CEO is trying to put her stamp on the company.
Kathryn Marinello came to Ceridian in October from General Electric, where she had been president and CEO of GE's Fleet Services business. She had worked for First Data Corp., First Bank System and Citibank before joining GE in 1997.
Ceridian said that Marinello or others at the company would not comment for this story.
In a written response to Pershing on Jan. 22, Marinello revealed that the company had hired a financial adviser to consider options, and said that "our management team is and has been focused on improving our operations, meeting with our customers, strengthening the productivity of our sales force, and otherwise seeking to enhance Ceridian's performance."
The next day, Pershing proposed its own slate for the company's board of directors.
This isn't the first time that Pershing has turned up the heat on a company. The hedge fund began pressuring McDonald's Corp. to boost profits by selling underperforming assets in late 2005.
The restaurant chain eventually shed its Chipotle Mexican-food chain, though McDonald's management said Pershing's criticism did not prompt the move.
Pershing soon acquired an ally. Earlier this month, Relational Investors LLC, a San Diego-based investment firm, sent a letter to Ceridian saying it intended to vote for Pershing's slate of eight board candidates and agreed that Comdata should be spun off.
SEC filings show that Relational Investors started taking a position in Ceridian stock late in 2004, but the letter from principal Ralph Whitworth made clear his frustration that Marinello had not found time to meet with the firm.
Relational is no stranger to proxy battles. Earlier this month, Home Depot Co. announced that it had reached a deal with Relational, which owns 26.5 million shares of the home-improvement retailing giant, and had been agitating for more control of the company's board.
The firm settled for a board seat for one of its principals, David Batchelder.
Together, Pershing and Relational hold about 15 percent of Ceridian's shares. Still, winning a proxy fight could be difficult.
Other large holders of Ceridian shares, including Fidelity, Vanguard and Barclays, aren't known for rocking the boat in proxy fights, said Joe Barsky, a former American Express executive who now teaches portfolio management at the Carlson School. But you can never be certain how things will play out, he said. "It's like counting votes in Congress."
In the late 1980s and early 1990s, when public companies saw a similar type of dissatisfaction from investors, they often found themselves the target of a leveraged buyout.
"Typically these people came after poor-performing companies and larger companies," Marcus said, where the break-up value of selling off the pieces would be greater. Now even smaller companies like Ceridian can feel the heat.
"I'm not sure I'd want to be the CEO of a public company at the moment," Barsky said. "The demands are crazy. Everybody wants instant gratification."
In some cases, companies have tried to come up with a compromise that would satisfy activist investors.
But it's hard to think of a compromise when the demand is that a unit like Comdata be spun off, said Beth Young, a research associate with The Corporate Library, a research firm specializing in corporate governance.
Pershing's plan to replace Ceridian's entire board also might not go over well, Young said.
"It's hard to find eight good people to run, and eight people who aren't your employees and your business partners," she said.
"With more mainstream investors, this approach is a harder sell. It risks alienating other shareholders because it's so audacious. We've seen it happen and it has succeeded a couple of times, which is mind-boggling."
But Pershing might not have to take things that far to get a big return.
When Ceridian reported fourth-quarter earnings last week, the results were less lopsided, as profit margins for the human-resources division improved substantially.
The company said it expected the division to become more profitable in 2007, and that revenue for the whole company would grow 5 to 9 percent.
The stock soared to new highs, and on Friday closed up 38 percent since Pershing took its position in Ceridian. J.P. Morgan analyst Tien-tsin Huang wrote recently that the spike seems to assume that the changes Pershing wants are already priced into the stock.
"Either way, we believe the fire has been lit and the stock has moved, putting pressure on execution on all fronts," he wrote in a research report.
John Welbes can be reached at jwelbes@pioneerpress.com or 651-228-2175.
www.twincities.com/mld/twincities/business/16717509.htm