William Ackman & his Target investment

Joe Nocera of The New York Times wrote an article late last week ripping William Ackman's tactics against Target. Although I respect Ackman's shareholder activism, his investment strategies leave a lot to be questioned. Ackman is all about financial engineering and I'm not sure that Target was a good target for him. He basically picked a well-run retailer, purchased when share prices were near a peak, and attempted to implement all sorts of financial engineering schemes.

Indeed, Mr. Ackman had become so successful that he was able to raise $2 billion for a fund that would essentially invest in only one company — and he would then go to work generating ideas to boost the stock price. The company this new fund invested in was Target.

But why? When somebody like Carl Icahn sets his sights on, say, Motorola, you may not agree with his methods, but you can’t deny he has taken aim at a seriously troubled company. But Target? In July 2007, when Mr. Ackman began buying the stock, the shares were trading in the 60s, near the all-time high. More to the point, Target isn’t exactly a troubled company. Rather, it is just about the only big-box retailer that has figured out how to compete successfully against Wal-Mart. Its 10-year stock performance is better than Wal-Mart’s. Analysts swoon over it. Customers, 80 percent of them women, love it.

“Bill Ackman is an idea machine,” Target’s chief financial officer, Douglas A. Scovanner, told me a few days before the meeting. Sure enough, he began presenting Target management with highly detailed ideas, most of which amounted to sophisticated financial engineering. The company should offload its credit card risk by teaming up with a financial institution, he said. (Target is one of the few retailers to manage its own credit card portfolio, instead of handing it over to a financial institution.) It should buy back $15 billion in stock. And so on.

Target, in fact, did sell off 47 percent of its credit card operation to JPMorgan Chase, which Mr. Ackman applauded at the time. (Later, he described it as a halfway measure.) But he was far from done. He then began agitating for a series of highly complex real estate transactions, the gist of which was that Target should spin off the land under its stores into a real estate investment trust. This time, after much to and fro — including many meetings with Mr. Ackman, and much consultation with its investment bankers at Goldman Sachs — Target declined to follow Mr. Ackman’s advice.

I don't follow Target and am not a financial analyst but I don't like the real estate strategy. By spinning off the real estate, it will burden Target in the future (troubled firms should consider these strategies but not market leaders.) If the company runs into financial problems, not that I am expecting it, it can easily go bankrupt if it is unable to service its rent.

Furthermore, spinning off real estate may have been viable when real estate prices were at, what may turn out to be, multi-decade highs, but is not feasiable anymore. Perhaps William Ackman bought Target when share prices were high because his estimates of real estate prices were high (this mistake would be similar to how many value investors bought Sears Holdings shares at $100 to $150 due to its real estate value but the projected real estate values were way too high and based on the real estate bubble.)

Just to be fair, I will also link to the super-long letter William Ackman fired off—and you thought some of my posts were long ;)—accusing Joe Nocera of being the mouthpiece of Target.


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