Below are excerpts from the letter that Pershing sent to Ceridian's Board of Directors.
As you are likely aware, Pershing Square Capital Management, L.P. and certain of its affiliates own approximately 11.3% of Ceridian's outstanding stock. We are writing to express concern about a number of recent developments that have caused us to reconsider the passive nature of our investment in the company.
We have followed Ceridian for some time. In our view, Ceridian has underperformed and failed to achieve its business potential for more than a decade. We believe that this view is widely shared by the investment and analyst communities. We also believe that the fundamental value of Ceridian substantially exceeds the value implied by its current share price. Furthermore,we are confident that, properly managed, the company offers the opportunity for shareholders to earn extraordinary returns.
As a result of our view of the company's undervaluation and the board's decision to replace the prior CEO, we initiated an investment in Ceridian with the expectation that the board and new management would pursue the low-risk,high-return strategy afforded by the company's current circumstance.
We had originally intended to hold Ceridian shares as a passive investment. However, two recent events have caused us to reconsider our intent. First, we now find ourselves very concerned that Comdata, which represents the majority of Ceridian's cash flow and equity value, may be on the verge of losing its President (Gary Krow), whom we believe is very important to the successful operation of that business. Second, based on our recent meeting with Ms. Marinello, we now fear that Ceridian as a whole may pursue a completely different strategic direction than what we or any other shareholder would have reasonably anticipated or desired.
As a first step, we believe that Ceridian should spin off Comdata to its shareholders. We believe - and expect the substantial majority of the company's shareholders and the investment community agree - that the logic of separating Comdata from Ceridian is so overwhelming that it is a business imperative.
With regard to HRS, we believe Ceridian management should focus on improving its remarkably low operating margins, its lackluster customer service record, weakness in its sales organization, and deficiencies in its technology infrastructure. These basic operational improvements would provide more than ample opportunity to enhance long-term value for all of Ceridian's stakeholders, including shareholders, customers, and employees alike. Furthermore, the intelligent use of the company's free cash flow and borrowing capacity created by a dramatically improved, rationalized, and standalone HRS business will further enhance shareholder returns over the long term. These goals should command the full focus of Ceridian's senior management for the foreseeable future. In addition, this strategy is materially less risky than expanding an operationally challenged business through acquisitions.
Source(s): Pershing Square Capital Management, Ceridian