Issues & Opinions

Earlier today, stories were making the rounds that a large holder of the stock of Ceridian, William Ackman of Pershing Square Capital Management, is agitating for alternatives to the proposed take-private acquisition of the company at $36/share. As seen in this Reuters story, he thinks the offer’s a low-ball:

(Reuters) - A large shareholder of Ceridian Corp. (CEN.N: Quote, Profile , Research) said it does not support the sale of the company to a consortium of buyers as the price offered was low.

In a regulatory filing, William Ackman’s Pershing Square Capital Management, which owns almost 15 percent of the company, said the $36 per share offer is suboptimal for Ceridian stockholders and it intends to pursue one or more value-maximizing alternatives.

Ceridian last month agreed to be bought by private equity firm Thomas H. Lee Partners (THL.UL: Quote, Profile , Research) and insurance company Fidelity National Financial Inc. (FNF.N: Quote, Profile , Research) for $5.3 billion in cash or $36 per share.

Short article, quoted in its entirety

And what are these other “more value-maximizing alternatives”, one might ask? The Wall Street Journal (among surely many other sources), has some fuller details on that, in a story also from today, entitled “Ackman to Explore Alternatives to Ceridian Bid“:

In the letter to shareholders filed with the Securities and Exchange Commission, Mr. Ackman said he has found interest in the human-resources and transaction-outsourcing company from a variety of strategic and private-equity buyers.

…

“In our view, the value-maximizing course of action is the pursuit of one or a combination of the following alternatives: a sale of the entire company at a higher price; a sale or separation of one or both of the company’s main operating units; and/or a recapitalization, dividend or self-tender transaction where significant value can be returned to stockholders, whether in combination with a broader transaction or otherwise,” Mr. Ackman said in the letter.

Mr. Ackman argued that Ceridian, which posted $1.6 billion in revenue last year and net income of $174 million, isn’t valued fully by Thomas H. Lee and Fidelity.

Right off the bat, it’s hard to complain about his desire for a higher price - he’d want that almost no matter what the first offer from TH Lee & FNF was. His preferred price? Infinity plus one, I’m certain.

Back here on Planet Earth, however, reality plays out a bit differently. Ackman is in the middle of a proxy fight with Ceridian, and he thinks that colored the Ceridian board’s decision to recommend acceptance of the only offer that’s so far been disclosed (with all due respect to Ackman’s assertion that there are other strategic and private equity buyers with interest).

“We do not support the sale of the company at this low price. It appears to us that the current deal is an ill-suited response to our proxy contest and is suboptimal for Ceridian stockholders,” the letter said.

So bring out the other deals, Mr. Ackman.

Among his other alternatives, he’s listed “a sale or separation of one or both of the company’s main operating units”. This is his apparent basis for the statement, also from the WSJ article (or, alternately, from this other Reuters piece):

Mr. Ackman argued that Ceridian, which posted $1.6 billion in revenue last year and net income of $174 million, isn’t valued fully by Thomas H. Lee and Fidelity.

A less than stellar company, in a less than stellar industry, has received a buyout offer at more than 30X earnings (and no, those aren’t depressed earnings - they’re the highest in the last 5 years, though not guaranteed to stay that high), and Ackman thinks he’s being bamboozled? That’s what happens when one commits oneself to a battle not worth fighting, I think.

Splitting the company up and selling the pieces? In a normal company, in a normal industry, that would be a good default practice. It’s been a while since I did so, but several years ago I had reason to become deeply enmeshed in the Ceridian financial statements. Mind you, things could have changed, and I apologize for pulling the numbers below from memory and not caring enough to go read all the latest financials at Edgar, but back in 2005, there were two distinct parts of the business: HR Services and Comdata, a stored value card processing company. Comdata was by far the smaller part of the business (less than 20% of revenue), but was responsible for almost 100% of the company’s combined cash flow.

There were several reasons for that anomaly at the time, and to my knowledge, none of them have changed. Comdata was the simpler of the two businesses, since it was unconcerned with the potentially touchy issues related to capturing and calculating the information required to produce employee pay checks, deductions, benefit statements, and so forth. The HR and payroll side of the business, by contrast, was built with a wild string of acquisitions, virtually none of which was ever integrated into a coherent service offering. As a Ceridian customer, for instance, the choice of back-end payroll system which produces your company’s checks or direct deposits is a direct function of the part of the country you’re in, and what company in that part of the country Ceridian purchased. If there’s a stupider way to grow a company by acquisition, other than taking $100 bills and setting them alight, I don’t know what it would be.

And so, the HR and payroll part of the Ceridian business is a complete piece of junk, held together by spit and bailing wire. As a standalone business, in its present state, it might be worth zero, on a good day. Comdata, standalone, isn’t worth anything close to the $5.3 billion presently being offered for the entire company.

Admittedly, my information on the company is potentially outdated. Back in mid-2005, the stock was grossly overvalued in the low 20s, so much so that no thinking private equity firm would touch it. The present senior management team hasn’t been in place even 9 months yet, and could not possibly have repaired all the damage done by the previous inept acquisition-happy crew. Based on my take on the company, I wonder whether Mr. Ackman, and the other shareholders whose interests he represents, wouldn’t be far better served to take the money and run, as fast as possible, to some other investment. Like 6 month CDs.

It might be time to quit harrumphing, take gains that won’t, in this skeptic’s view, be available again any time soon, and get the heck out of Dodge.

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