Analysis: Ackman's CP Rail win puts Canada boards on notice

Tue May 22, 2012 8:29am EDT
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By Susan Taylor and Allison Martell

TORONTO (Reuters) - The unprecedented boardroom rout that storied Canadian Pacific Railway (CP.TO: Quote) suffered this week at the hands of a brash New York hedge fund is a flashing warning signal for other members of the Canadian corporate establishment.

If a blue-chip bastion like CP Rail, Canada's second-largest railroad, can succumb to an activist's push for change, companies of all stripes best prepare for closer scrutiny of their boards and challenges to their authority, experts say.

"There's a lot more shareholder activism coming," said Thomas Caldwell, chairman of Caldwell Securities, a Toronto investment management firm. "Frankly, I think a lot of shareholders have been let down by management and boards."

Pershing Square Capital Management's bold campaign to shake up CP - carried out with a brashness rarely seen in Canada's staid business culture - sent a powerful message about the clout activist funds can wield, investors and academics say.

"It just needed people to become aware that they could do this," said Ian Lee, a business professor at Carleton University in Ottawa, Ontario. "We were asleep in Canada, so to speak, I mean we were in a deep slumber."

Late last year, when Pershing first announced it was buying up shares of industry laggard CP, few would have guessed it could persuade institutional investors to reshape the board and replace the CEO. But Pershing founder William Ackman, known for his stubborn persistence, proved the naysayers wrong.

Still, it took deep pockets to fund Ackman's months-long campaign: an estimated $10-15 million on top of the $1.4 billion he spent buying up a 14.1 percent stake in CP.

Canadian hedge funds may lack those resources, but their U.S. counterparts don't, said Kai Li, a finance professor at University of British Columbia in Vancouver. Li co-authored a paper published in the Journal of Finance that hailed hedge funds as "corporate angels" rather than vultures.   Continued...