By THEO VAN DE KLETERSTEEG
Since Pershing Square Capital Management L.P. reported its initial purchase of common shares of Canadian Pacific Railway (CP) in October 2011, the fund’s principal, Bill Ackman, has left no doubt that he is seeking changes at the senior management level to unlock what he believes is unrealized shareholder value.
Ackman appears to have approached Hunter Harrison to take over as the chief executive officer at CP, and put forward Harrison’s name as part of Pershing Square’s presentation to the Board of CP. In the latest salvo, CP made public a letter dated January 3, 2012, written by CP Chairman John Cleghorn to Bill Ackman in which he is expressing “concern about recent media reports”. Cleghorn advised Ackman “It is disappointing and highly inappropriate that Pershing Square made inaccurate comments in an article appearing in last Friday’s edition of The Globe and Mail … in an effort to advance its own objectives.” Cleghorn also denied that CP’s board had extended an invitation to meet with Harrison, either directly or through Pershing Square. The letter concluded tersely that “Leaks to the media are counterproductive, and we hope that they are not attributable to you personally.”
Looking at history, most of the credit for transforming Canadian National from a money-losing government-owned railway into one of the best-run railways in North America needs to be given to Paul Tellier, who was appointed as CN’s president and CEO in October of 1992. He replaced most of those in CN’s executive suite, and rid CN of agreements and practices that stifled productivity. Tellier was also instrumental in ensuring that new legislation would be adopted to do away with the last vestiges of regulations that had been such obstacles to efficient operations.
Tellier’s efforts culminated on November 17, 1995, when the government sold its shares to underwriters, and CN became a publicly owned corporation.
In 1998, CN acquired Illinois Central Railroad (IC) in a game-changing acquisition. IC, which operates a line running from Chicago to New Orleans, turned CN from a transcontinental railway connecting Canada’s East and West to a NAFTA railway connecting almost any point in Canada to the U.S. central heartland and to Mexico. This added greatly to its strategic strength by enhancing its capability to provide single-carrier service. During the following decade, CN made several other acquisitions, most of which were aimed at increasing its capacity in and around its now vitally important Chicago hub, and efficient routing of traffic to and from that hub.
As a result of these acquisitions, when Hunter Harrison assumed the position of CEO for CN in January 2003, he inherited a revitalized and highly efficient railway. He filled CN’s CEO position for seven years, focusing on operational excellence, which he coined “precision railroading”, and fine-tuning CN into North America’s most cost-efficient class 1 railway. During his presidency, CN increased revenues from $5.9 billion to $7.4 billion, and increased net income from $1.014 to $1.854 billion.
Harrison is 67 years old, and is a “free man” following the expiration of his non-compete contract with CN and other railways on January 1, 2012. Given Harrison’s result-oriented tenure at Illinois Central Railroad (where he was President when it was acquired by CN) and also at CN, it is not surprising that Bill Ackman approached him to lead a railway that he felt was not delivering the results it was capable of.
Cleghorn’s letter is strongly suggestive of a board that is united behind its chairman. However, assuming that Harrison confirms his availability and interest, it is well possible that a number of directors, impressed by Harrison’s record of achievements, will be enticed meet with him, and to listen to his views about CP’s “hidden” opportunities. In the event that Harrison should be presented as an available and interested candidate, CP’s board will have little choice but to consider his candidature seriously, unless it can develop a credible alternative plan for significant performance improvement that shareholders can buy into. CP has a well-diversified and highly experienced board to guide the company through its current controversy. On the other hand, Bill Ackman and Pershing Square Capital Management are equally experienced, and are not known for giving up their pursuits. The stakes are high, and the players are determined. At the end of the day, though, maintenance of the status quo is a highly unlikely scenario, and it will be most interesting to watch how the ultimate outcome will develop.