Business Forum: Investor activism gone wild

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William Ackman, the investor-activist who runs the $12 billion hedge fund, Pershing Square Capital, is like one of those guys you used to see in a certain kind of old-fashioned comedy. On one shoulder sits an angel, encouraging his better nature. On the other sits a devil, whispering temptation.

When he listens to the angel, Mr. Ackman does amazing things. He made a $25 million contribution to the Newark, N.J., school system, an early and important match against the $100 million that Facebook's founder, Mark Zuckerberg, put up in September 2010. Yet unlike virtually every other actor involved in the Zuckerberg grant, who have been squabbling ever since, Mr. Ackman attached virtually no strings to his donation. He wants his money to be used to help Newark's schoolchildren -- not to push someone's reform agenda.

Then there's his current Herbalife crusade. After making a $1 billion bet that the stock would fall, Mr. Ackman released a lengthy report alleging the company was running an illegal pyramid scheme. I have been sadly constrained from writing columns about the Ackman-Herbalife battle because the company had the wit to hire my fiancee's employer, David Boies, after Mr. Ackman unveiled his attack. I was, as they say, "conflicted out."

But I will say this: Pyramid schemes are a hidden scourge, hurting millions of people seduced by their get-rich-quick promises. Until Mr. Ackman began agitating, the federal government had largely capitulated to the "multilevel marketing" industry (as it likes to be called), even exempting it from a law passed a few years ago specifically aimed at curbing pyramid schemes. Mr. Ackman has been heroic in taking on this litigious, well-financed industry. Not since Jim Chanos went after Enron has a hedge fund manager been willing to question whether a company was actually a criminal enterprise. That takes guts.

Also, his track record as an activist has been good; you don't get $12 billion in assets if you don't win more than you lose.

But there is always that devil on the other shoulder. A few years ago, Mr. Ackman took a position in Target's stock. Because of the recession, retailers such as Target were struggling. To get the stock up, Mr. Ackman began throwing out ideas that amounted to financial engineering. He then mounted an expensive proxy fight to get on the board, which thankfully, he lost. The stock has since rebounded. Target didn't need financial engineering; it just needed a better economy.

Which brings me to his latest retail foray, J.C. Penney. Is there a single word that can sum up what has befallen J.C. Penney since Mr. Ackman took a stake in the company? Yes: disaster.

J.C. Penney had long catered to lower-middle-class families searching for sales. Its chief executive, Mike Ullman, who had been at the helm since 2004, was widely viewed as solid, if a tad unimaginative. He had led J.C. Penney to some of the most profitable years in its history. But, by the fall of 2010, hurt by the same recession that hurt Target, Penney's stock was way down. That's when Mr. Ackman showed up.

Being a big-time activist-investor, Mr. Ackman could hardly allow Mr. Ullman to remain at the helm. Activists have to be, you know, active. Within a year, he landed the executive everyone in retail wanted: Ron Johnson, who had built Apple's retail business. Imagine: A Steve Jobs disciple was going to run down-market J.C. Penney. What could possibly go wrong?

Pretty much everything. Mr. Johnson decided to eliminate the sales that had always been J.C. Penney's trademark and move to everyday low prices. He thus alienated the core J.C. Penney customer. He kept talking about how he was going to apply the lessons he had learned at Apple to J.C. Penney, even though the companies sold completely different products to completely different customers. As the core customers departed, Mr. Johnson and J.C. Penney didn't have the merchandise or cachet to attract a more upscale, Target-type customer. People abandoned J.C. Penney.

At the end of 2012, J.C. Penney announced that its revenues had fallen a staggering $4.3 billion. It has laid off some 20,000 people. Walter Loeb, the former longtime retail analyst at Morgan Stanley who now blogs for Forbes.com, is predicting that its revenues will decline another 22 percent in the first quarter of 2013.

Lately, Mr. Johnson has brought back sales and devised a new strategy, revolving around "stores within stores" -- selling merchandise much the way Bloomingdale's does. One of its ministores will be devoted to Martha Stewart-designed home goods. You may have read about that. Macy's, which says it has a contract that prevents Ms. Stewart from selling housewares to other retailers, has sued. On the stand during the trial, I'm told, Mr. Johnson kept referring to his experience at Apple. Some people never learn.

The question is no longer whether Mr. Johnson will learn in time. If the quarter is as bad as Mr. Loeb is predicting, he'll be gone soon. The question is whether Mr. Ackman has learned anything. The next time the devil whispers in his ear, let's hope he doesn't listen.

bizopinion

Joe Nocera is a columnist for The New York Times.


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