Ackman Claims ADP Is Drastically Overstating Its Stock Returns

The heady shareholder returns that payroll processor ADP is promoting to fend off activist hedge fund manager Bill Ackman are vastly overstated, Ackman’s Pershing Square Capital Management claims in a new analysis.

ADP says it has produced a total shareholder return of 203 percent since Carlos Rodriguez was named CEO in 2011, but Pershing Square’s analysis claims the more proper calculation is 141 percent — far below ADP’s rivals and an overstatement of 62 percentage points, Pershing Square argues. The hedge fund plans to release the details of its analysis on Monday.

In a statement to Institutional Investor, ADP stood by its numbers. “Pershing Square’s claim that ADP has underperformed is not based on the facts,” the statement said. “ADP has generated total shareholder returns in excess of 200 percent since Carlos Rodriguez became CEO nearly six years ago, significantly outperforming the S&P 500 and its peers.”

[II Deep Dive: Ackman Says Changing ADP Will Likely Require a New CEO]

ADP has argued that its stock performance demonstrates why the company doesn’t need any help from Ackman. It rebuffed the activist’s efforts to join its board without a public fight, so the hedge fund firm has mounted a proxy effort, taking its case to shareholders. A vote on competing board nominees is slated for November 7. Pershing Square is seeking three seats on ADP’s ten-person board.

Pershing Square’s analysis argues it isn’t Rodriguez who is responsible for all of the excess gains ADP claims, as a chunk of ADP’s returns is related to Ackman’s own investment, as well as efforts by another activist, former Pershing Square partner Scott Ferguson, whose Sachem Head Capital Management invested in ADP spinoff CDK. Nor does it include Rodriguez’s first day as CEO, when the stock fell 4 percent.

In a September 14 letter to stockholders, which was filed with the Securities and Exchange Commission, ADP claimed that the 203 percent total shareholder return has occurred since Rodriguez became CEO in November of 2011. That number is higher than the returns of its closest rival, Paycheck, which has gained 138 percent during the same time period, and the average gain for the group of companies it calls rivals, which returned 153 percent during a similar time period.

But that last figure is higher than what ADP has returned, by Pershing Square’s calculation, and the hedge fund firm says that when looking at another, more realistic, group of direct competitors, ADP underperforms by even more — 24 percentage points.

Rodriguez’s hire as CEO was announced before the markets opened on November 9, 2011. ADP’s stock fell 4 percent that day, his first as CEO, but the ADP analysis left out that day’s returns, with its starting point after the close, Pershing Square notes. It also ended the calculation at noon on July 27, after ADP missed analyst estimates on its quarterly earnings but the stock nonetheless had been shooting up on widespread Street rumors that Ackman was buying, leading other hedge funds to bid up the stock. ADP shares began to falter after it started its aggressive campaign against Ackman on August 4.

ADP’s figures include the returns of CDK, which it spun off on October 1, 2014. Ackman argues these gains should not be included, because the changes at CDK weren’t orchestrated by Rodriguez. It was only after another activist, Sachem Head’s Ferguson, convinced the spun-off CDK to make changes to boost its margins — much like Ackman is suggesting for ADP — that its stock price doubled, Pershing Square claims.

If ADP’s returns are calculated from the close of November 8, 2011, to May 9, 2017 — the day before Ackman started buying stock — and did not include the gains made by CDK after it was spun off, ADP’s total shareholder return, which includes dividends, is 141 percent, according to Pershing Square.

So far, Ackman has been on the defensive in the proxy battle. Shares have fallen almost 3 percent since August 4, the day ADP issued a pre-emptive press release even before Pershing Square had filed its 13D with the Securities and Exchange Commission disclosing an 8.3 percent stake.

Last week, Ackman said he is taking the battle to retail shareholders, who have been important in at least one activist victory recently: Elliott Management’s battle with Arconic. Retail investors own 28 percent of ADP’s shares. Most of Pershing Square’s stake is in derivatives, with only two percent in common stock. Those are the only shares the hedge fund will be able to vote.