Shareholder activists are increasingly influential in Canada’s M&A landscape, but expect that trend to intensify with a proposal to list Pershing Square Holdings on the Euronext Amsterdam stock exchange. The listing is expected to complete Bill Ackman’s capitalization of the new $5 billion fund associated with Pershing Square Capital Management. The listing, which is likely to be complete by mid-October, will provide Mr. Ackman with the stable pool of capital he has long believed his investment strategy would benefit from.
In his 2014 Q2 letter to investors, Mr. Ackman expressed frustration that the Pershing Square group of funds must keep a substantial portion of its assets in cash. Shareholder activism requires taking a position in a company for at least long enough to exert pressure on management and see the results reflected in the company’s share price – a proposition sometimes measured in years. Operating without a strong capital reserve can ruin an overextended fund if too many investors request their money back at the wrong time, as nearly happened during the financial crisis when investors withdrew 27% of their assets from Pershing Square.
This necessary caution becomes even more onerous for a shareholder activist when they engage companies with a large market cap – a strategy that requires immense capital to establish and sustain a position, and strains the fund’s reserve of cash assets. In the case of Pershing Square, Mr. Ackman’s letter to investors makes it clear that large-cap companies on the scale of the Fortune 500 are precisely his intended target. The solution? A public offering and exchange listing, and with it, a massive infusion of capital not exposed to the whims of a fund’s private investors.
After Pershing Square’s 2012 proxy battle for Canadian Pacific ended with the incumbent board toppled and Hunter Harrison installed as CEO, the vulnerabilities of blue chip companies to shareholder activists are well known. But even within that category, there is more than one shade of blue. In May of 2011, four months before Pershing Square purchased its stake, Canadian Pacific ranked only 48th on the list of biggest Canadian corporations by market cap. Pershing Square committed roughly $1.4 billion to Canadian Pacific in order to build the position it needed for its proxy battle to succeed, which at the time was the largest single initial commitment Pershing Square had ever made.
Between the new Pershing Square listing and pledges already destined for the new fund, Mr. Ackman will have deposited more than three times that amount in his war chest – and because of the public source of the capital, a higher percentage of it can be employed, instead of held in cash. There are several dozen Canadian companies larger than Canadian Pacific was at the time of its proxy battle, and they all now have another reason to refresh their strategy to manage shareholder activism.