Gloves come off in the fight for Canadian Pacific

Posted by Fred Frailey
on Monday, January 16, 2012

Hedge fund manager Bill Ackman and the captains of industry who sit on the board of Canadian Pacific don’t play well together. Last Monday, after each side revealed the contents of emails they had exchanged in confidence, Ackman declared war, announcing he will wage a proxy fight in May to unseat an unspecified number of board members and compel the railroad to oust chief executive officer Fred Green in favor of his candidate, retired Canadian National CEO Hunter Harrison. By last weekend, even Canadian National was publicly involved, warning Harrison to “think twice” about going to work for the competing CP.

For those who have been asleep the past few months, the story up until now is this: Ackman’s New York investment company, Pershing Square Capital Management, bought 14 percent of CP’s shares. The railroad’s 70-year-old non-executive chairman, retired Royal Bank of Canada CEO John Cleghorn, offered Ackman a seat on the board and nothing more, and that only if Ackman would agree to cease making waves. But Ackman let it be known he wanted Harrison to run the poorly performing railroad in place of Green. And there the matter stood until Wednesday, Jan. 4.

That was the day that Ackman, 45, sent Cleghorn an email with the words “War and Peace” on the subject line, reports The Globe And Mail, Canada’s national newspaper. In this email, Ackman told Cleghorn, a military history buff, that his “border war” would turn into “a nuclear winter” if Ackman's demands for a new CEO (and two unconditional seats on the board) were not met. Ackman later told the newspaper: “I was laying out clearly and directly what was going to happen.”

Outraged by the upstart Yankee investor, CP’s board on Monday, Jan. 8, publicly broke off already-strained discussions with Ackman and formally dismissed the idea of hiring Harrison, who is widely credited with turning CN from the least-efficient railroad in North America to the most efficient. And within hours if not minutes, Ackman launched his “nuclear winter,” a proxy fight to prevail in the war over who will take Canadian Pacific forward as its CEO.

Canadian National waded into the free-for-all at week’s end with a curious public warning to Harrison, 67, who retired as that railroad’s CEO at the end of 2009 and whose non-compete agreement with CN expired at the stroke of midnight Jan. 1. CN told Harrison to reconsider joining forces with CP should Ackman prevail. Reached by the Wall Street Journal, Harrison said he has no intention of doing as his former employer wishes. “I had a two-year non-compete [and] the two years has expired," he said.

In any event, Canadian railroaders I’ve spoken with believe CN’s warning is really aimed internally at Keith Creel, an American who is CN’s own chief operating officer and executive vice president of operations and a Hunter Harrison protégé. The two men get along well. Should Harrison get the top job at Canadian Pacific, he almost certainly would want the far younger Creel to help him implement what would be far-reaching changes. And Creel in turn would surely seek to entice many of his own people to join him at Canada’s other big railroad. For Canadian National, this would spell utter disaster.

So gather your popcorn, get comfortable, and watch what happens, folks. I will leave you with this observation: Four years ago, a similar proxy battle played out at CSX in the U.S. CSX chairman Michael Ward faced in the Children’s Investment Fund, based in London, a far less-savvy opponent than John Cleghorn does in Pershing Square, which has a history of getting its way with lagging companies. And CSX had far more going for it, in the form of surging profits and fast-rising dividends, than CP does now. Yet for all of that, CSX lost. — Fred W. Frailey

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