SHAREHOLDER ACTIVISM: This Changes Everything!
ON THE EVENING OF OCTOBER 28, 2011, Canadian Pacific Railway Vice-President Paul Guthrie and a senior team were travelling across Canada, touring the company’s facilities, when Paul received a call. CP’s legal advisory firm had heard a rumour: activist hedge fund Pershing Square Capital Management (‘Pershing’) was buying up CP stock — and had surpassed the five-per-cent threshold requiring it to notify the Securities and Exchange Commission (SEC) of its activity.
Headed up by William Ackman, Pershing was a private, U.S.-based hedge fund that took positions in companies it considered to be under-valued. With US$7.78 billion in assets under management, it had already made investments in Target, Kraft Foods, J.C. Penney, Citigroup and Wendy’s — where Ackman had forced the sale of its Tim Hortons operations.
Unbeknownst to CP’s senior team, earlier that year, a group of 20 portfolio managers from different firms had assembled at an upscale Manhattan restaurant to discuss “financial opportunities in the transportation sector”. At the dinner, one of the attendees had initiated a tirade against CP’s CEO, Fred Green, suggesting that he was incompetent, and that an activist investor should pressure the Board “to do what it should have done long ago.”
An associate of one of the attendees that night was Paul Hilal, a partner at Pershing who knew a lot about CP. Through a flurry of subsequent phone calls and discussions, Pershing gathered key information, numbers were crunched and a battle plan was set in motion. By fall of 2011, Pershing was ready to make its biggest play ever: a $1.4-billion bet on CP, including a plan to replace Green with retired industry legend Hunter Harrison, former head of CP’s rival, Canadian National Railway Co.
Pershing’s focus was on CP’s performance over the last few years, as reflected in a simple statistic: the operating ratio (operating costs as a percentage of revenue) as a measure of efficiency. In 2011, CP’s number was 81, in contrast
