This story first appeared in the October 19, 2010 issue of WWD. Subscribe Today.
J.C. Penney Co. Inc. chairman and chief executive officer Myron E. “Mike” Ullman 3rd and the rest of its board sent a missile back to activist investor William Ackman on Monday by adopting a shareholder rights plan, or poison pill, that would make it prohibitively expensive for anyone to take over the retailer without the consent of the board.
So far, Ackman, ceo of Pershing Square Capital Management, hasn’t expressed an interest in acquiring the whole company. But the investor has taken a 16.5 percent stake in the Plano, Tex.-based Penney’s and said he wants to meet with management about operations and strategy. He’s working with Vornado Realty Trust, which owns another 9.9 percent of the retailer.
If Ackman ups his stake or if anyone else hits the 10 percent mark, the rest of the shareholders would get the opportunity to buy a portion of a preferred share of the company for $130. The effect would be to lessen the stake of the would-be acquirer, who can’t participate in the plan, and to jack up the overall price tag by astronomical proportions.
The company’s shares fell 57 cents, or 1.7 percent, to close at $33.30 in New York Stock Exchange trading Monday.
“It effectively dilutes the acquirer out of the picture,” Douglas Hand, attorney at Hand Baldachin & Amburgey, who has worked on both sides of hostile takeovers but is not involved in the Penney’s battle, said of the poison pill. “The acquirer really must deal with the board. They’re doing what they can to have the conversation occur with the board and to be in control of that process.”
With a poison pill in place, Ackman can no longer simply offer to buy shares from other stockholders and gain control at the firm. He would have to come up with an offer that was sweet enough to get the board to remove the poison pill.
“What management appears to be doing is taking a very defensive, crouched position,” said Craig Johnson, consultant and president of Customer Growth Partners. “I would love to see J.C. Penney put as much energy into reviving its core business. Companies that put in poison pills most typically have done so to protect entrenched management.”
Johnson said the company has been on the wane and trying to stem the market share losses with new deals and collaborations, such as MNG by Mango shop-in-shops and a new Liz Claiborne exclusive.
Ackman is seen as a savvy player who is not afraid to take his case directly to shareholders or to try to oust boards. He made repeated and public appeals for change at Target Corp. and spent $10 million in an unsuccessful attempt to place five directors on the retailer’s board last year.
Penney’s is more vulnerable than Target was since its 12 directors serve one-year terms ending at the annual meeting next spring. And as part of a bloc controlling more than 26 percent of the company, Ackman is in a stronger position, making him a potentially more potent force when it comes to shaking up the board.
The investor has been generally quiet on his plans for Penney’s, though he appears to think the retailer could do more to cut expenses. Ackman could not be reached for comment Monday and Penney’s declined to elaborate on any interactions with the investor.
“The company did not fire people over the last couple years, which means they have a lot of untapped potential,” Ackman said at the Value Investing Congress last week.
Over the last four quarters, Penney’s selling, general and administrative expenses ate up 32.6 percent of revenues, making the company’s expense structure more akin to its across-the-mall competitor Macy’s Inc., at 33.1 percent, than Kohl’s Corp., at 24 percent.
“It’s underperformed in recent years because of its bloated cost structure and its poor value proposition,” said Robert F. Buchanan, an assistant finance professor who studies retail at St. Louis University. “It’s no surprise that certain shareholders are not enamored at what’s going on at J.C. Penney.”
Buchanan said Ullman was a fighter and a good retailer, but that he’s had a tough time of it at Penney’s. “It’s not mission impossible,” he said. “It’s mission improbable.”
But Ullman is no stranger to takeover battles. He previously showed his grit as ceo of R.H. Macy & Co. as he fought to extract it from bankruptcy with its independence still intact. He lost that battle and, in 1994, Macy’s was acquired by Federated Department Stores Inc., which has since renamed itself Macy’s Inc.
Penney’s is working with financial advisers Barclays Capital Inc. and Goldman, Sachs & Co., the latter of which helped Target successfully face down Ackman.
The retailer said the rights plan was put in place “to promote fair and equal treatment of J.C. Penney’s stockholders in connection with any initiative to acquire control of the company and in light of recent rapid accumulations of a significant percentage of the company’s outstanding common stock.”
The rights plan expires in a year.