J.C. Penney has reached into its bag of tricks and pulled out a tool that is becoming more and more popular to thwart Pershing Square’s Bill Ackman from taking over the company or taking a much bigger stake. The department store company Monday announced it has adopted a poison pill that it asserts is “in the best interests of all its stockholders.”
Under the Stockholder Protection Rights Agreement each shareholder is permitted to purchase a fraction of a share of J.C. Penney preferred stock if anyone acquires 10 percent or more of J.C. Penney’s common stock or, in the case of any person or group that currently owns 10 percent or more of the common stock, if they acquire additional shares. The poison pill expires in one year.
The move is obviously designed to thwart Ackman, who last week scooped up 16.5 percent of the company, and Vornado Realty Trust, the REIT that bought 9.9 percent of the shares. The pill makes it financially unattractive for the two activists to buy more shares of Penney, thus entrenching management.
Of course, in their announcement, the company says the move is designed “to promote fair and equal treatment of JCPenney’s stockholders in connection with any initiative to acquire control of the company.” Little surprise, the stock sank Monday by nearly 2 percent, indicating investors don’t buy management’s argument.
Under the Rights Plan, Pershing Square and Vornado cannot buy the preferred stock.
So what will Ackman do? Most likely, he will quietly dump his stock rather than get into a protracted battle with the company. His only alternative is to hang around and launch a proxy fight and gain a majority of the Board seats. Then he would be able to scrap the pill. This is a realistic possibility since Penney does not have a staggered Board of directors, which means all of its directors are elected annually, making it easier to wrest control of the company in less than a year.
Penney actually let its original poison pill expire in 2009. However, the new pill is one of those short duration pills, which are growing in popularity. These are not approved by shareholders and designed to thwart a specific takeover.
According to FactSet SharkWatch, currently 916 companies currently have a poison pill in general. For years it was rare for any company to have a poison pill whose term was less than the standard 10 years. However, this has changed in recent years. For example, in 2008 and 2009, 126 and 121 companies, respectively adopted pills. This was up from 84 in 2007. What’s more, 40 percent of the newly adopted pills in 2008 were for five years or less and 45 percent in 2009. This compares with just 26 percent in 2007 and 19 percent in 2006.
In 2010, after the stock market’s runup, just 50 companies instituted pills. However, 70 percent of them were of the shorter duration kind. Obviously companies are not shy to use this weapon when an aggressive investor shows up on the scene.
We’ll see if management truly does seek to benefit all shareholders, or just themselves.
