Why Ackman Can't Back Down from Target Fight

A Dog of a Campaign

Barron’s writer Andrew Bary gave voice to a question that is probably on many analysts’ and investors’ minds…what exactly is Bill Ackman‘s beef with Target (TGT)?  The company has done just about everything right.  Pershing Square‘s Ackman is basically barking up the wrong tree and I think I know why.  He’s painted himself into a corner.

From Barron’s:
Target is under attack by an activist investor who has lost his shirt, and his clients’, in a hedge fund that bet the wrong way on the direction of the company’s shares. Bill Ackman, head of Pershing Square Capital Management, launched the unusual single-stock fund, Pershing Square IV, in 2007, investing $2 billion only in Target call options and other derivatives. The fund lost 90% of that money as Target’s shares plummeted 50%, to 31 earlier this year. The fund has recovered somewhat since then, as the shares have rebounded to 41, but it remains down about 80% since inception.

The rest of the article goes on to detail how much better Target has done than almost all competitors, how well they’ve navigated the recession thus far and how uninspired the rest of TGT’s investors are by this proxy contest, which will be resolved later this week.  Management also publicly scoffs at Ackman’s contention that Target selling off it’s real estate portfolio or spinning it into a REIT will add value.  They view this whole thing as a distraction, and they are probably right.

Why then is Pershing Square pursuing this multi-million dollar waste of time?  The answer is simple: they have no choice.  When you launch a “single-stock” fund, there is basically no turning back without admitting you are wrong.  Guys at Ackman’s level do not make such admissions, even under pain of water-boarding.

His problem here is the whole “sell the real estate, lease back the stores’ space, unlock the property value” thing.  That concept is so 2005.  Many companies (especially retailers) have played this game at the behest of activist shareholders like Ackman and I can’t think of very many success stories.

I can think of some high-profile failures, like bankrupt Six Flags, which pursued the land-selling strategy at the behest of activists who eventually took the company over, including Dan Snyder (Redskins Owner) and his puppet CEO (Mark Shapiro from ESPN).  They sold a bunch of land, licensed the Six Flags name and logo to sell water guns in Wal-Mart (WMT) and pretended to be doing something about the gangs in the parks, but at the end of the day, the strategy failed.  With a distressed company like Six Flags, real estate value being unlocked would not fix a broken business.

In the case of Target, real estate is not holding the company back at all.  It’s 2009, and Ackman’s 2007 vintage fund concept is played out.  The best thing that can happen to him is a defeat for the board seat he seeks with his 3% stake so he can walk away “having tried his best”.  I predict his loss and subsequent liquidation of the Target-only fund within a month or so.

Ackman is talented and Pershing Square has a good track record; as a fan of activism in general, I think Bill’s wasting his time on this one, as do most other spectators.  Move on, Pershing Square.  Target’s not a worthy target.

Full Story: Campaign Off-Target (Barron’s)

Full Disclosure:  I am not long or short shares of TGT.  Do not trade based on anything you read on this site.