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Todd Sullivan
Todd Sullivan
Articles (5983) 

Ackman Sends Letter To CEO of Target Corp.

March 26, 2009 | About:

Let's put aside the fact Ackman seems to know Target's bylaws better than they do (or at least pretend to). In the revised 13D/ a just filed, Ackman states:

Subsequent to the delivery of the Original Notice, we received a telephone call from your outside counsel informing us that the Board of Directors of the Company (the “Board”) currently consists of 12 directors and that only four directors are up for election at the 2009 Annual Meeting.

As we have explained in detail in a separate letter from Mr. Ackman to Mr. Gregg W. Steinhafel, Chairman, President and Chief Executive Officer of the Company, based on our review of the Company’s Restated Articles of Incorporation and its filings with the Securities and Exchange Commission, we are of the view that size of the Board remains at 13 members. While the resignation of Mr. Robert Ulrich on January 31, 2009 created a vacancy in Class III of the Board, the size of the Board has not changed.

This is pretty simple. Target, recognizing that Ackman is likely to win seats on the Board, is trying to shrink it to minimize whatever effect his nominees may have. But, if you are a shareholder you have to ask, why? Ackman left shareholders of McDonalds (MCD), Chipolte (CMG), Wendy's (WEN) and Tim Hortons (THI) far better off than when he arrived. Shareholder also have to ask, if this guy is the largest shareholder of the company, aren't his interests totally aligned with ours?

Here is the letter Ackman sent the CEO Greg Steinhafel:

Exhibit 99.1

March 26, 2009

Gregg W. Steinhafel

Chairman, President and Chief Executive Officer

Target Corporation

1000 Nicollet Mall

Minneapolis, Minnesota 55403

Re:Number of Directors for Election at the 2009 Annual Meeting of Shareholders

Dear Gregg:

On March 16, 2009, affiliates of Pershing Square Capital Management, L.P. delivered a Notice of Nomination to Target Corporation proposing to nominate five individuals for election as directors of Target at the Company’s 2009 Annual Meeting of Shareholders. The same day, Target issued a press release indicating that its board is comprised of 12 directors and that the Company is nominating only four directors for election at the 2009 Annual Meeting. Subsequently, we received a telephone call from your outside counsel informing us that the Target Board currently consists of 12 directors and that only four directors are up for election at the 2009 Annual Meeting.

We disagree with the Company’s position on this issue. We have reviewed Target’s SEC filings and have found no disclosure to the effect that the size of the Target Board has been changed from 13. We are aware that Mr. Ulrich resigned in January, but a board does not automatically shrink as a result of a resignation; rather, a vacancy is created, in this case, a vacancy in Class III of the Target Board.

Our view is informed by the Company’s Restated Articles of Incorporation, which provide that only the shareholders may reduce the size of the Target Board. Specifically, Article VI of Target’s Restated Articles of Incorporation provides the following:

“The business and affairs of the corporation shall be managed by or under the direction of a Board of Directors consisting of not less than five nor more than twenty-one persons, who need not be shareholders. The number of directors may be increased by the shareholders or Board of Directors or decreased by the shareholders from the number of directors on the Board of Directors immediately prior to the effective date of this Article VI; provided, however, that any change in the number of directors on the Board of Directors (including, without limitation, changes at annual meetings of shareholders) shall be approved by the affirmative vote of not less than seventy-five percent (75%) of the votes entitled to be cast by the holders of all then outstanding shares of Voting Stock (as defined in Article IV), voting together as a single class, unless such change shall have been approved by a majority of the entire Board of Directors.” (emphasis added)

Article VI was adopted at Target’s 1988 Annual Meeting of Shareholders. Immediately prior to the effectiveness of Article VI, the size of the Target Board was 13. Under Article VI any reduction in the size of the Target Board requires a shareholder vote. As the Company’s shareholders have not been asked to vote on any matter since the 2008 Annual Meeting of Shareholders, we believe that the size of the Target Board remains at 13. While Mr. Ulrich’s resignation created a vacancy on the Target Board, the size of the Target Board has not been changed to our knowledge.

If the Company continues to believe that the size of the Target Board is 12 and that only four seats are up for election at the 2009 Annual Meeting, we believe that the interests of the Company and its shareholders would be best served by a quick, low-cost resolution of this issue. Therefore, we would suggest that we jointly submit the issue to a binding arbitration that will take place in Minnesota and will be decided by a mutually acceptable arbitrator, pursuant to the AAA Commercial Rules of Arbitration.

If, on the other hand, you agree with our interpretation of the Articles of Incorporation, you can simply nominate a fifth director.

It is in all of our interests to resolve this issue promptly. Please let me know how you would like to proceed. Thank you.

Very truly yours,

/s/ William A. Ackman

William A. Ackman

So, what then is the problem with management? Why are they stonewalling every idea Ackman has to create shareholder value? Do they have other plans? If they do, none have been announced.

Here is the reason. Management is entrenched at Target. They have all been for for a long time. None of them have any experience running the type of organization Ackman is proposing (the Board members he has nominated do) and what they are fighting is the feeling that should he get his way, they become less important or worse, irrelevant. What they fail to realize is by simply dismissing him out of hand, they are doing just that.

How long do they think shareholders will sit for a fallen and stagnant stock price before they want to "see what the other guy can do"? Is there any plan to reverse the same store sales decline that is now over a year old? Shareholders surely have noticed that Wal-Mart (WMT) shareholders are not suffering the same fate.

Current management has done a fantastic job brining the company to it current state, a well respected retailer, probably the second in the nation. But, they are stuck and sitting back waiting for the economy do lift them out of their funk will not cut it with shareholder as they watch Wal-Mart's taillights disappear into the distance.

Todd Sullivan

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Todd Sullivan
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Rating: 1.6/5 (14 votes)


Kfh227 - 8 years ago    Report SPAM
The only problem with TGT right now is perception. If you just walked out on the street and asked who charges less, TGT or WMT ... the answer would be WMT. TGT needs to improve it's brand and its image. That's all that is needed.

As a side note, I've always liked WMT for one stupid reason. They have a very old building as their main headquarters. They hasn't built a trophy building in the center of NYC. And they don't spend over a million dollars on the office furniture that the CEO wants like Merrill did for John Thain.

I honestly do not know what TGTs offices are like but I am hard pressed to see something less exotic than WMTs offices.
Indy - 8 years ago    Report SPAM
Kfh227 that is a good point. Whenever a company builds a shiny new skyscraper for its office, you can be sure the stock is overpriced.
Amit Chokshi
Amit Chokshi - 8 years ago    Report SPAM
The problem is people not realizing they fcked up paying a stupid price for TGT at $70. There were articles openly questioning Ackman's purchase of TGT. They openly cited Ackman's idiotic real estate plan, the limited number of buyers for TGT's CC portfolio, and the ridiculous valuation for TGT based on unsustainable trends. TGT made money off private label/TGT branded clothes priced a round $12-30 per item for "cool" apparel when branded stuff was 2x that price. Problem is branded became that same price and TGT had no edge. Ackman and all of his lemming like followers overpaid and are now crying about it and wanting to get involved but are just a total distraction.

Ackman has a history of being a worthless activist. His intervention in MCD was nothing but a disaster. The only thing he ever accomplished was the WEN/THI influence of a spin-off. TGT mgmt is actually oe of the best around but they compete with beasts like WMT, COST, BBY...did thye lose their edge or is the market just doing what it did to WMT? Why is Todd not pounding the table abotu COST losing value or BBY or BBBY? Paying $70 for TGT is no different than paying $280 for RIMM, you can overpay for anything and so can these snake oil salesmen like Ackman.

Cm1750 - 8 years ago    Report SPAM
I agree. Ackman's purchase of TGT was similar to Relational's purchase of HD around 2005-6. They both did not understand that the bubble economy was supporting these companies' revenue, real estate values and store credit operations.

I think this is a good lesson that investors need to look at macro trends to see whether company's results are sustainable.
Fk - 8 years ago    Report SPAM

I watched the bloomberg video clip where Ackman explained the real estate premise. I believe he said he wanted to spin off the real estate into a different company so that Target could use leverage to acquire prime commercial real estate selling at distressed prices today. Without the spinoff, they would not have access to that kind of capital to make deals. What's the downside of what he's proposing?

Amit Chokshi
Amit Chokshi - 8 years ago    Report SPAM

Ackman first started buying TGT in summer 2007, right around when commercial RE was starting to fall off in value. His rationale back then was to sell the real estate through a sale leaseback, sell of the credit card portfolio, and then use all of that cash to buyback TGT stock. It's basic financial engineering nerds do in finance classes. So he was saying sell an expensive asset to buy more of another expensive asset.

Now, he's saying create a REIT and use the proceeds to buy distressed RE? So Ackman wants TGT to sell an undervalued asset and use the proceeds to buy distressed RE and assume the development costs? Why the hell would TGT want to monetize its CRE now? Nobody wants CRE and more importantly TGT's CRE has value that is above what the market would pay for it and TGT has NO NEED to sell it, it has no liquidity issues. So the idea to sell it to buy more real estate is jsut stupid. TGT can easily go out with its own cash in hand to do that, it's just a stupid idea Ackman is proposing.

There are a few reasons this idea is just moronic. The first is that this environment for selling anything sucks. TGT CRE has value, as we all know when you have a solid tenant like a TGT or WMT, it raises the value of surroundign RE in that neighborhood so TGT CRE is good stuff. So if mr market quoted BRK-A at $20k to me, would I sell that because like some crappier insurance co is trading for a cheap price too or would i just hold on to my BRK-A and figure to check back in a year assuming I, like TGT, have no liquidity problems and don't need to monetize my BRK? It's the same thing with TGT CRE - they have no reason to sell at firesale prices which is what they'd get in this market.

Next, if TGT sells its CRE, now all of a sudden they have lease payments to deal with. So TGT sells its CRE at a stupid price through a REIT spin-off. So the way it would work is that bankers would structure it and say TGT REIT is priced at X based on what comparables like say SPG are at but discount it due to TGT REIT having just one main tenant. So with SPG and other REITs at multi-year lows in terms of price and valuation, TGT shareholders would get a crappy deal on the REIT spinoff. So TGT investors get far less cash for the CRE spin off and now TGT has to make lease payments and have that additional burden. Margins are already hard enoguh to protect against guys like COST, WMT, BBY, BBBY, etc but now TGT is saddled with lease payments.

Then Ackman wants TGT to use the proceeds from spining off TGT CRE in a REIT to go out and buy distressed CRE. Why? TGT's expansion plans are fairly muted. Guys like Vornado and other RE players are not doing much which might indicate that if the guys that live/breathe this are not interested in developing RE, why is TGT? But assuming TGT wants to increase its expansion plans due to the CRE bust, they can do that with their own cash flow and issuance of bonds. Since they own their CRE, they can get financing against that at terms that are not like what HOG or say SPG had to deal with given TGT's better credit standing and ownership of real assets in CRE.

Scubasteve10 - 8 years ago    Report SPAM
And i thought Tilson was an Ackman clone. Looks like Todd is blindly following mr. ackman into every security he owns. I hope he didn't follow him into target call options. Ouch!
Fk - 8 years ago    Report SPAM
Thanks for the explanation Dizzy. It's really great to have a knowledgeable resource like yourself to comment on the other aspects of guru strategies.

Sivaram - 8 years ago    Report SPAM
Dizzy you are on a roll ;)

Anyway, I think Ackman did do something useful for Target. If I'm not mistaken, he got Target to sell off 50%(?) of its credit card portfolio. Assuming Target isn't liable for the portion it sold, it may have been a good thing. CC losses seem to be rising and Target's losses seem to be some of the worst.

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