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After Bitter Feud, Ackman Divorces JCP

The startlingly public corporate feud between hedge-fund manager William Ackman and JC Penney (JCP) simply refuses to wane. After being forced to resign from the board after aggressively campaigning for the ouster of acting CEO Mike Ullman, Ackman is now attempting to sell his 18 percent stake in the company.

Ackman’s financial firm, Pershing Square Capital Management, currently controls 39.1 million shares, making Ackman the largest single shareholder of JCP.  He plans to sell the whole lot of it, reportedly at $12.90 a share.

The timing of Ackman’s announcement is as noteworthy as its substance. JCP recently announced its second quarter earnings which were less than auspicious. The once dominant industry leader reported a dizzying $586 million loss for the second quarter ending August 3rd.

This brings JCP’s total reported losses to $934 million, a considerable leap from the tally at this point last year of $310 million. Sales have plunged in the second quarter 11.9% and 14.2% for the year in total so far.

Also, JCP’s board just recently adopted a new shareholder rights plan, known as a “poison pill,” that effectively discourages new investors from buying up new shares in order to acquire control of the company. The plan works as follows: “rights” are distributed to every single shareholder according to the number of shares each controls. For every share, one right is dispensed. Those rights are not immediately exercisable until the shareholder obtains the status of “acquiring person,” which requires ownership of no less than 10 percent of JCP’s common stock. By definition, Pershing Capital is excluded from ever being considered an acquiring person. The anti-takeover mechanism takes effect August 20, 2014.

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JCP had implemented the poison pill plan once before, in October 2010. At that time, it was widely understood that it was specifically designed to prevent Ackman from buying up shares in order to install himself on the board by making such a takeover prohibitively expensive. That particular battle was won decisively by Ackman, who acquired 17.7 percent of the retailer, and became a major influence on the company’s strategies going forward. He was also a key player in bringing Ron Johnson on board, orchestrating Johnson’s speedy exile, elevating Mike Ullman to the vacated post and then calling for Ullman’s removal. The trajectory of Ackman’s impact on JCP is a good example of what is often referred to as “activist investing.”

The dispute between Ackman and the JCP board has only become more embittered over time, spreading virally beyond the company’s corridors. Before Ackman’s resignation, JC Penney Chairman of the Board Thomas Engibous expressed his own consternation: “The Board of Directors strongly disagrees with Mr. Ackman and is extremely disappointed that his letter was released to the media at the same time that it was sent to the Board. Mr. Ackman has been integrally involved in the Board`s activities since he joined two years ago. This includes leading a campaign to appoint the Company`s previous CEO, under whose leadership performance deteriorated precipitously. His latest actions are disruptive and counterproductive at an important stage in the Company`s recovery.”

After Ackman’s two letters to JC Penney’s board urging them to expedite the replacement of interim CEO Mike Ullman went public, Starbucks CEO Howard Shultz unleashed an angry complaint: “Mike is working tirelessly to save this company, and it is despicable of Ackman to leak a letter asking for his removal. The irony is that Ackman himself has every step of the way severely damaged this company.” Ullman sits on the board of Starbucks.

Then the following week, Ackman called into Charlie Rose’s show on PBS and lambasted Starbucks CEO Howard Shultz for publicly criticizing him. “I think he doesn’t really understand the facts. He’s a good friend of Mike Ullman, who sits on the board. You know the reality is Howard Schultz, when he brought in the new CEO– the board brought in Jim Donald to be the CEO of Starbucks a number of years ago and things were going poorly. Howard Schultz wrote a memo to the board that was leaked to the press and it’s not clear who leaked that memo to the press.”

As Ackman jumps ship, other investors seem to be doubling down that JCP’s fortunes are about to experience a happy reversal. Hayman Capital, a financial firm operated by Kyle Bass, has been gathering shares bullishly betting on a JCP turnaround. George Soros and Perry Capital are also advancing their current stakes in the retailer.

Ackman has always insisted his only aim is the resuscitation of JCP’s flatlining empire.  “As the largest shareholder of JC Penney, I have only one goal: help save one of the great iconic American companies,” he said.