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John Cleghorn is the chairman of Canadian Pacific Railway and a former chief executive officer of Royal Bank of Canada. (Will Lew for The Globe and Mail)
John Cleghorn is the chairman of Canadian Pacific Railway and a former chief executive officer of Royal Bank of Canada. (Will Lew for The Globe and Mail)

The story behind the all-out war to control CP Add to ...

Talks between Mr. Ackman and Mr. Cleghorn cooled after the December setbacks. According to people familiar with the discussions, telephone calls and e-mails between Mr. Ackman and Mr. Cleghorn tapered off. The lack of communication was interpreted by the Pershing Square camp as a sign that the board did not want to hire Mr. Harrison.

By Jan. 4, Mr. Ackman was tired of waiting, and he fired of his War and Peace e-mail.

Deal experts said it is likely he has been so forceful with the company because he has a high degree of comfort that CP shareholders will support his bid to replace Mr. Green and a minority of the company’s directors.

While shareholders may disagree about his tactics, many agree Mr. Ackman’s trump card is Hunter Harrison. The Memphis-born railroader, who began his career squirting oil at train wheels, earned his legendary status in the industry by transforming Illinois Central Railroad and Canadian National into two of the industry’s most profitable and admired companies.

Although he is 67 and has been sitting on the retirement bench for two years, media reports about his potential candidacy earlier in December sent CP’s stock higher.

Mr. Harrison’s chief selling point is his 11-year record as CN’s chief operating officer and then CEO, ending in 2009. Under his leadership, the railway improved productivity by streamlining staff, setting detailed schedules and closely monitoring the amount of time trains spend in rail yards.

He squeezed profits from every corner of the railways operations, including a controversial introduction of penalties slapped on customers that were late loading or unloading freight.

Translating his success at CN won’t be easy at CP. CP’s tracks travel through more rugged terrain. For example, CP trains travel more slowly through Western Canada because they must pass through spiral tunnels in the Kicking Horse Pass in the Rockies. By contrast CN trains climb lower grades through the Yellowhead Pass.

CP has the additional burden of heavier labour costs. Seeking greater flexibility from the Teamsters union in operating trains, the company is in contract talks and wants the ability to unilaterally establish workdays of up to 12 hours and set new rules on vacation. The Teamsters represents 4,800 CP conductors, engineers and rail traffic controllers.

Battle preparations

If CP’s board and Mr. Ackman are unable to overcome their differences and strike a settlement, shareholders can expect months of furious campaigning from both sides ahead of a vote that is expected to take place at CP’s annual meeting in May.

According to market sources, the campaigns are already starting to take shape. CP is casting Mr. Ackman as a fast-buck artist whose primary interest is a quick return on his investment. As for his candidate Mr. Harrison, he is past retirement age, is anchored in his Florida home and his reign at CN was controversial.

Pershing Square is seeking to cultivate shareholder support by dismissing CP’s campaign as an outdated script. Unlike corporate raiders of the past who made quick money pushing targets into takeover play, the hedge fund positions itself as a medium-term investor whose people works inside the tent with new management to increase long-term value at underperforming companies.

The stakes are high if the dispute between the company and the activist goes to the brink with a proxy vote. If Mr. Ackman follows through on his e-mail threat to challenge the performance of CP’s board of distinguished directors, he could find himself in a messy feud with powerful business leaders who have many allies in Canada’s leading business and political institutions.

If he wins shareholder support for an alternative slate of directors, the embarrassing upset will make it harder for directors of other companies to assert their authority over rebellious investors who hold minority stakes. Unlike directors, who are bound by a legal obligation to act in the best interest of the company, minority investors are free to act in their own self-interest.

A loss for Mr. Ackman would hand him his second humiliation in less than three years. In 2009, Mr. Ackman lost a bruising proxy battle to replace directors at Target, the Wisconsin-based retailer. The defeat cost Pershing heavily. The fund that bought the Target shares lost so much of its value shortly after the showdown that Mr. Ackman cut fees and apologized for one of “the greatest disappointments of my career to date.”

So far, Mr. Ackman has reaped a huge return from his CP investment, as market enthusiasm for him and the prospect of Mr. Harrison has sent the company’s stock on tear, increasing the value of his holding by more than $300-million to date. That gain could evaporate quickly if his quest to put CP on a new track fails, an outcome that Mr. Ackman does not appear willing to consider.

“We will win the election by a landslide vote,” he boasted in his e-mail to Mr. Cleghorn. “Let’s avoid having a border skirmish turn into a nuclear winter, life is too short.”

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