The announcement on
Wednesday that William A. Ackman’s firm, Pershing Square Capital Management,
had acquired a 9.8 percent stake worth $2.2 billion in Air Products and
Chemicals no doubt elicited feelings of schadenfreude in the headquarters of
Airgas. After all, only a few years ago, in 2010, Air Products made a $5.9
billion hostile offer for Airgas. Air Products’ offer failed when Airgas
resisted, and then Air Products lost a court case seeking to force Airgas to
redeem its poison pill and allow Air Products to acquire the company.
Mr. Ackman is likely to
follow a well-worn path taken by both activist investors and his own fund,
repeating the steps that Pershing Square took in its successful $1 billion
investment in the Canadian Pacific Railway.
The first step is to play
nice and seek to meet with company management. And this is what Mr. Ackman
has already stated he wants to do. The situation will then escalate,
depending on the company’s response, with the real threat being a proxy
contest to unseat Air Product’s directors.
What will Mr. Ackman ask
for at this meeting? Well, Air Products has lagged its peers in stock price
performance in recent years. He is likely to use this underperformance to
ask for some board seats and an overhaul of management. He is also likely to
ask for tweaks in business direction and operations, but nothing
If you need evidence for
this, you need only look at the
Schedule 13D for its Air Products investment filed by Pershing Square on
Wednesday. Investors often scrutinize Item 4 of these schedules, which
requires an investor to disclose any ”plans and proposals” for the company.
Usually, the language in Item 4 is boilerplate and ignored. But in this
case, it directly states Pershing Square’s intentions. It says that Pershing
to engage in discussions
with management, the board of directors, other stockholders and other
persons that may relate to governance and board composition, management,
operations, business, assets, capitalization, financial condition,
strategic plans and the future of the Issuer. Basically this can be viewed
as an escalation of priorities for Pershing Square.
There you have it. Pershing
Square will first seek to reorganize the board and next deal with
management. It’s a one-two punch that will directly threaten the executives
at Air Products. In other words, Mr. Ackman likes the company a lot, but
management not so much.
This will be the parameter
of Mr. Ackman’s first conversation with Air Products. So the question now is
what Air Products will do.
issued a statement on Wednesday, stating that it “welcomes new investors
and looks forward to engaging with Pershing Square to understand its views.”
In a bit of cheek, the company also began its defense. Air Products states
that its 2013 “total shareholder return” was 21.6 percent as of July 24, the
day before it announced adoption of a poison pill.
But this return takes into
account the rise in Air Products stock as rumors spread of the Pershing
Square position. According to its Schedule 13D, Pershing Square began buying
in June when the stock was trading at $91 to $95 a share (it’s now above
$109 on the news). Before then, the stock was only up about 5 percent for
the year and lagged its peers.
Air Products is willing to
speak to Mr. Ackman, and that is also the standard response of companies
these days to activist investors. But it’s unclear how cooperative Air
Products will be. Will the company really want to replace its directors and
management, or even add Mr. Ackman or Pershing Square’s suggested directors
to its board?
If there are disagreements,
Pershing Square’s future conduct will be guided by
the poison pill Air Products adopted. This pill is a “low threshold”
poison pill. It is set off when someone acquires 10 percent or more of the
company, instead of the standard 15 percent. In fairness to Air Products,
though, the threshold rises to 20 percent if the buyer is a passive
institutional investor, something Pershing Square is not.
Air Product’s poison pill
has already worked and reportedly stopped Mr. Ackman from buying even more
of Air Products. And unusually, Air Products has directly implied that the
pill is aimed at activists. At the time it adopted the pill, Air Products
stated that it “will help promote the fair and equal treatment of all
stockholders of the company in the event of an accumulation of a substantial
block of the company’s shares.”
The most important thing
about the pill is perhaps not the cap it sets on Pershing Square’s
ownership, but its definition of “acting in concert.” This is the standard
by which investors will be grouped together for purposes of counting whether
the pill has been triggered. The idea is that if parties are acting
together, their ownership should be counted together for the purposes of the
poison pill’s ownership limitations. The poison pill defines acting in
concert to be any “agreement, arrangement or understanding” with respect to
“acquiring, holding [and] voting” Air Products shares.
This is broad language and
the effect is that Pershing Square will be quite limited in the types of
discussions it can have with other shareholders about Air Products.
Nonetheless, the low threshold here and broad definition of “acting in
concert” is state of the art in defending against activist investors. And
any legal challenge to this definition is unlikely to be successful. Similar
“acting in concert” language was
upheld by a Delaware court in the case involving Barnes & Noble and Ron
Burkle’s private equity firm, Yucaipa.
The effect of this
language, though, may not be the deterrent that Air Products intends. The
risk of inadvertently setting off the poison pill is too great. This pill,
then, will literally force Pershing Square to do a lot of its work out in
the open and in public so that it cannot be accused of having any
“understanding” or “arrangement” from a private meeting with other
In the background of any
disagreement looms the threat of a proxy contest by Pershing Square to
unseat Air Products directors. Air Products has an 11-member board with
members serving staggered terms. So only about a third of directors can be
unseated in any given year. The company’s last annual meeting was on Jan. 24
and will be around the same time in 2014. Unless changed by the company,
nominations for directors are not due until Oct. 26.
This all means that the
next few months will be occupied by talking about management changes and
perhaps fruitful attempts to make nice. But in the background, Pershing
Square will have the threat until October of nominating its own directors
and starting a proxy contest. And make no mistake, Pershing Square has acted
on this threat before.
The paradox here is that if
there is a proxy contest, it would leave the decision in the hands of Air
Products’ shareholders. I use the word paradox because in 2011, Air Products
criticized Airgas for using a poison pill to block its bid
and stated, “It is time for the Airgas Board either to negotiate with us
or terminate the company’s poison pill and let Airgas shareholders decide
It’s a lesson for companies
that their own words and actions may be used against them. It may also be
the time when we will see whether Air Products lives up to the spirit of
that statement with its own shareholders.
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