Wednesday, April 18, 2012

What does William Ackman really want?

Written by  William C. Vantuono, Editor-in-Chief

I have a general philosophy about hedge funds. I’ll trust them about as far as I can throw them. The way I see it, hedge funds have no business trying to be in the railroad business.

Why? Because, from what I have seen, hedge funds—the people who run them, and the people who invest in them—are philosophically at odds with the most fundamental premises of the freight railroad business: Railroads are in it for the long haul. They must invest in their physical plant if they are to thrive and survive. They offer long-term growth prospects for their shareholders. They are an integral part of the economy. If you want to get rich quick, take your money and look elsewhere. So a hedge fund whose only interest is short-term self-interest has no place in the railroad industry.

Warren Buffett understands what successful railroading is really all about. Buffett invests in companies that offer long-term value and growth. That’s why he bought BNSF. Enough said.

I’ve spoken up about hedge funds before. Remember CSX and the Children’s Investment Fund proxy battle a few years ago. Remember my “Take your hedge fund and shove it” editorial (Railway Age, December 2007, p.4)?

Now we have another hedge fund, Pershing Square Capital Management, led by CEO William Ackman, attempting to take over Canadian Pacific, install its own board of directors, and oust and replace CEO Fred Green. This proxy battle is a little hard to figure out, though.

CP itself will not deny that, compared to the rest of the “Big Seven” North American Class I’s, it has been underperforming. It has its Multi-Year Plan in place to address this, and has been making steady progress. CP’s first-quarter 2012 earnings, which will be released later today (April 19), are expected to be excellent.

I, for one, while having a tremendous amount of respect for Fred Green, cannot question the merits of Hunter Harrison, Pershing Square’s candidate to replace Green as CEO. Without a doubt, Harrison is one of the best operating men in the business. Whether he and his management style are a good fit for CP remains to be seen, but this former Railway Age Railroader of the Year has a proven track record.

So does Steve Tobias, Norfolk Southern’s retired chief operating officer, another Railway Age Railroader of the Year and, like Harrison, one of the best operating men in the business. Tobias is one of Pershing Square’s candidates for the CP board. How can I possibly argue with choices like that?

Making matters a little more murky is CP’s attempt at one-upmanship. In a recent letter to shareholders, after accusing Ackman and Pershing Square of making “misleading and inaccurate statements,” CP said that its board “has an open offer to William Ackman to join the CP board. CP has included Mr. Ackman as a CP nominee on the company’s WHITE universal proxy and recommends that shareholders vote for Mr. Ackman to join the CP board. The CP board is confident that once Mr. Ackman understands the facts and how the CP management team is executing on the Multi-Year Plan, he will endorse the Plan. The Board unanimously recommends that shareholders vote FOR the election of the director nominees proposed by CP on the WHITE universal proxy, which will include all of the CP and Pershing Square nominees.”

It’s kind of like Captain Kirk inviting the commander of a Klingon battle cruiser to shut down his phaser banks, beam aboard the Enterprise and join the crew as First Officer. Fascinating, for sure. Logical?

I have a question for you, Mr. Ackman. What is it you really want? Are you looking for long-term growth and stability at Canadian Pacific? Are you interested in the good of this industry? Is that why you have chosen solid railroaders like Hunter Harrison and Steve Tobias for your assault on CP? Or is your true motivation enriching your coffers and turning a quick profit? You tell me. I will reserve judgment. But I think you know where I’m coming from.