"It all started with a phone call from my brother." And so begins the fascinating story of how Pershing Square Capital Management's Paul Hilal coaxed legendary railman Hunter Harrison out of retirement, and into the role of chief executive officer of Canadian Pacific Railway Ltd.
Mr. Hilal, a partner with Pershing and board member with CP, told the story to a captive audience of corporate directors, hedge fund managers, investment bankers, mergers and acquisitions lawyers and journalists Thursday at the Activist Investing in Canada Conference in Toronto.
In the summer of 2011, Mr. Hilal's brother, a portfolio manager at another hedge fund, told him that he had overheard investors "venting their frustrations" about a Canadian railway. Mr. Hilal's interest was piqued, and he quickly figured out that CP was likely the company in question.
A cursory review of CP's financials revealed that its operating margins were far below its peers. Why was that, he thought? Were its shortcomings caused, as management claimed, by "unique structural challenges?" Or did the company simply need someone else in charge? By the end of summer, Mr. Hilal concluded the latter. With new board members and a new CEO, a "staggering amount of value" could be unlocked. It would be easier said than done, though. Mr. Hilal figured that finding nominees for the board would be doable, but finding the right CEO would be more challenging.
During his study-up period on CP, Mr. Hilal repeatedly came across the name "Hunter Harrison." Mr. Harrison worked at Canadian National Railway, CP's great rival for over a decade, and served as its CEO from 2003-2009. During his tenure, he helped transform CN from an underperformer into the most efficient railroad in North America. But now Mr. Harrison was out of the picture. He had been retired for almost two years by then, and was living about as far out of the public eye as you can get for a former CEO – on a horse farm in Connecticut.
Mr. Hilal decided that he should at least put a call into Mr. Harrison – if he could find his number, that was. After a Google search, Mr. Hilal dug up the number for Mr. Harrison's horse farm. Mr. Hilal cold called the farm, unsure of what reception he'd get, or even whether Mr. Harrison would take his call.
But Mr. Harrison did take his call. Mr. Hilal introduced himself in a fairly vague fashion (as an individual at a New York-based investment fund) and asked Mr. Harrison if he would be willing to chat about the rail industry. Chat they did – for over two and a half hours! That initial conversation, Mr. Hilal recounts, was an eye-opener. "It was clear that Hunter was a great communicator, possessed an uncanny genius for operations, culture, and leadership, and was an extremely charismatic person of great integrity." Mr. Hilal also got a crash course in "precision scheduled railroading," the operating philosophy that Mr. Harrison had innovated and refined over a half century. It was also clear to Mr. Hilal that "Hunter's passion and fire still burned," and that, he said, "there was no way Hunter should have been retired." Mr. Hilal was pretty sure that Pershing had found its man.
With each follow-up conversation Mr. Hilal had with Mr. Harrison, something else became evident. Even without broaching the subject directly, it was becoming clear that Mr. Harrison himself was starting to think seriously about coming out of retirement. But what Mr. Hilal had to do was indirectly put the idea of running CP into Mr. Harrison's head – at this point Mr. Hilal wasn't in a position yet to formally offer him the job, but he needed to gauge his desire. As part of the delicate back and forth, Mr. Hilal wondered aloud to Mr. Harrison, "Wouldn't it be something if you left the horse farm behind, and came back for one final act of turning around CP? After all who would know how to fix CP better than you, the man who successfully ran CN Rail, its toughest competitor for years?" By the look that came across Mr. Harrison's face, Mr. Hilal just knew Mr. Harrison would be up for the challenge.
In the meantime, investors continued to lose faith in CP. Its shares had declined steadily over the latter part of the summer of 2011. By late Sept, CP was trading below $46 dollars a share. Within Pershing, Mr. Hilal was "pounding the table" on CP. By that time, Pershing's founder Bill Ackman saw enough potential to act decisively. "Bill loved the business model, and understood the potential," Mr. Hilal said. "We started buying shares aggressively, often up to 20 per cent of the daily volume."
By early October, it was time to pull the trigger and get Mr. Harrison and Bill Ackman in a room together to see if their personalities would click. "The project could only succeed if they connected and trusted each other." said Mr. Hilal. "Bill, the most direct person I know, said simply upon meeting Hunter, 'We respect you a lot. We are well on our way to owning more than 10 per cent of CP. There may be a proxy fight. Things might get messy. But we think you are the perfect choice to run this railway. Are you in?'"
And just like that, Pershing had nabbed someone Mr. Hilal, calls "the greatest railroader who ever lived," to run CP. While the hunting down of Hunter Harrison was largely an initiative orchestrated by Mr. Hilal, he is quick to point out that the CP project was also a team effort, highlighting in particular colleague Brian Welch, "who was pulled onto the CP project the day he joined Pershing that September, and made invaluable contributions throughout."