Pershing Square Releases Seventh Question for ADP
Pershing Square Capital Management, L.P. (“Pershing Square”) today released its seventh question for ADP (NASDAQ:ADP). ADP has yet to answer any of the first six questions posed by Pershing Square. Today, Pershing Square released the following question:
We understand that ADP has commissioned various consulting studies over recent years which have outlined substantial efficiency opportunities. Please outline for shareholders the conclusions of these studies. What corporate inefficiencies did these studies address – including management spans and layers, real estate consolidation, and ADP’s siloed and outdated business unit structure - and what was the timing and the magnitude of the potential savings identified? Were these consulting studies shared with the Board?
Pershing Square’s previous questions are:
Question 1 – September 20, 2017:
What are ADP’s margins in Employer Services by sub-segment (Small-Business (“SMB”), Mid-market, Enterprise, and International), excluding float and allocating corporate expenses?
- Is ADP earning comparable margins to Paychex (~41%) in its SMB business? If so, that would imply 12% margins for the rest of Employer Services.
Question 2 – September 28, 2017:
When ADP owned Dealer Services, it aimed to produce just ~50bps of annual margin improvement. When Dealer Services was spun-off as CDK Global (NASDAQ:CDK) (“CDK”), it promptly identified an opportunity to double margins without negative consequence to CDK’s customers, shareholders or other stakeholders. Why was ADP not able to realize this opportunity when it owned CDK?
- CDK achieved this improvement by engaging constructively with shareholders, hiring an outside consultant to evaluate its potential, and announcing a transformation plan – why won’t ADP do the same?
Question 3 – October 5, 2017:
Why is ADP’s labor productivity ~28% below its competitors’, particularly in light of its enormous scale advantage?
Question 4 – October 10, 2017:
Competitors like Workday, Ultimate Software and Ceridian’s Dayforce have taken substantial market share at the expense of ADP, despite ADP spending significantly more on R&D. Why doesn’t ADP have a best-in-class product for the Enterprise market?
Questions 5 and 6 – October 19, 2017
Why does ADP continue to claim a 203% Total Shareholder Return (“TSR”) during Mr. Rodriguez’s tenure when this number includes an inaccurate start date, the increase in the stock price due to Pershing Square’s involvement, and the performance of CDK when it was no longer managed by Mr. Rodriguez?
In recent shareholder communications, ADP is now claiming that it is implementing a plan to deliver 500bps of operational margin improvement. ADP’s recently released guidance shows only 100bps to 200bps of actual operating margin expansion by 2020 which compares with our estimated potential margin opportunity of 1,200bps by 2022. Investors cannot reconcile this 500bps calculation. Please provide support for this calculation and explain why these supposed savings do not translate into better operating margins.