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Starbucks chief Howard Schultz steps into JC Penney fight, saying hedge fund manager Bill Ackman is a “destroyer of companies”; “Bill Ackman has blood on his hands for being the one who brought Ron Johnson in”

Last updated: August 9, 2013 8:19 pm

Starbucks chief steps into JC Penney fight

By Barney Jopson and Dan McCrum in New York

Howard Schultz, chief executive of Starbucks, has accused the hedge fund manager Bill Ackman of being a “destroyer of companies” as he stepped into a fight between the investor and the struggling retailer JC Penney. Mr Schultz, one of America’s best-known businessmen, spoke out after Mr Ackman, a JC Penney board member, wrote a letter urging fellow directors to find a new chief executive quickly and released it to the media. “I thought it was disgusting,” Mr Schultz told the Financial Times, accusing Mr Ackman of bypassing established governance procedures. “When I saw what happened [on Thursday] . . . I’m distraught.”

The JC Penney dispute has escalated into one of America’s most public and ill-tempered corporate spats and marks a return to the days of activists as reviled insurgents.

Mike Ullman, the JC Penney chief executive who Mr Ackman is trying to force out, is a member of theStarbucks board. Mr Ackman’s Pershing Capital owns nearly 18 per cent of JC Penney.

“As someone who runs a public company, I’m speaking out on behalf of people whose livelihoods can be destroyed by people like this,” Mr Schultz said of Mr Ackman.

Perry Capital, a hedge fund that owns 7 per cent of JC Penney, sided with Mr Ackman on Friday, saying it wanted JC Penney to hire Ken Hicks from Foot Lockeras chief executive and appoint Allen Questrom, a former JC Penney chief, as chairman.

Mr Ackman has already forced Mr Ullman out of the job once, in 2011, when the activist investor installed ex-Apple executive Ron Johnson in his place.

But Mr Johnson oversaw a disastrous fall in sales and in April the board ousted him and rehired Mr Ullman.

“Bill Ackman has blood on his hands for being the one who brought Ron Johnson in,” Mr Schultz said.

Over the past decade the perception of activists has changed as many have sought to work with boards rather than against them, transforming themselves from agitators into mainstream advocates of shareholder rights. But Mr Ackman has often been ready to deploy the confrontational tactics of old.

Mr Ackman did not offer a response to Mr Schultz’s criticism. However, he released a second letter to the board on Friday calling for JC Penney’s chairman, Thomas Engibous, to be replaced as well.

Mr Ackman said his Thursday letter release was “an extraordinary step”, but that he did it because “our board has ceased to function effectively”.

Mr Engibous counter-attacked on Friday, for the second time in two days, calling Mr Ackman’s comments “misleading, inaccurate and counter-productive”.

JC Penney has initiated a search for a new chief executive, but Mr Ackman wants the company to speed up and find one in 30 to 45 days.

Mr Ackman said: “I am concerned that a small subset of the board is negotiating and speaking on behalf of the full board, that the rest of the board has not been properly informed and has not been given an opportunity to express its views.”

JC Penney shares were down almost 6 per cent at $12.85 in mid-afternoon trading in New York, after falling almost 10 per cent to a low of $12.34 in the morning.

Ackman Calls for Replacing J.C. Penney Chairman Amid Board Feud

J.C. Penney Co. shareholder Bill Ackman said the retailer should replace Chairman Tom Engibous because the board isn’t functioning effectively.

Major personnel decisions are being made without the input of the full board and important financial information isn’t being shared with all directors, Ackman, whose Pershing Square Capital Management LP is the company’s largest shareholder, said in a letter to the board obtained by Bloomberg.

The request marks the latest salvo in a feud between Ackman and his fellow J.C. Penney board members that began yesterday when the investor publicly released a letter calling for a speedier process to replace Chief Executive Officer Mike Ullman. Ackman said today that former J.C. Penney CEO Allen Questrom may be willing to rejoin the company as chairman even before a new top executive is chosen.

J.C. Penney, based in Plano, Texas, fell 3.5 percent to $13.18 at 10:09 a.m. in New York.

To contact the reporter on this story: Beth Jinks in New York at bjinks1@bloomberg.net

Ackman Calls for Ouster of J.C. Penney Chairman

Bill Ackman won an ally in hedge fund Perry Capital LLC in his efforts to oust J.C. Penney Co. (JCP) Chairman Tom Engibous and Chief Executive Officer Mike Ullman.

Perry today reported a 7.3 percent stake in the retailer and echoed Ackman’s comments that the board should seek to quickly overhaul its management. The board isn’t functioning effectively, major personnel decisions are being made without the advice of all directors and important financial information is being withheld, Ackman, whose Pershing Square Capital Management LP is the company’s largest shareholder, said in a separate letter to fellow board members today.

Perry’s support gives Ackman, who handpicked former CEO Ron Johnson, more sway as he presses J.C. Penney to name a new team that can implement a turnaround plan and stanch his losses on the stock. Ackman and Perry together own about a quarter of the retailer’s shares. The rest of the board so far has stood its ground, saying that Ullman is the right CEO to revive the company and that the board is working properly.

“He’s clearly alienated the rest of his directors on the board,” Jeffrey Sonnenfeld, senior associate dean at the Yale School of Management, said in an interview. “His chosen candidate, Ron Johnson, virtually destroyed this great American icon and now he’s throwing a tantrum about the guy they brought in to replace him.”

Ullman, who returned on an interim basis at age 66 in April, has revived price cutting and brought back merchandise to attract core customers alienated by Johnson’s strategy, which centered on ending discounting and remaking the stores into collections of boutiques.

Ullman Decisions

Ackman today criticized Ullman for making a number of important decisions without consulting the full board. Ackman said he terminated AlixPartners, which a person familiar with the matter told Bloomberg had been hired in April to help the retailer get fresh financing. Ullman also cut off Blackstone Group LP’s access to the company’s financial information and ended its role in analyzing the company’s position, Ackman said.

Ullman has been using Centerview Partners LLC and co-founder Robert Pruzan, Ackman said. Representatives of Blackstone didn’t immediately respond to requests for comment. Tim Yost, an AlixPartners spokesman, and Christopher Beattie, an outside spokesman for Centerview, declined to comment.

Other personnel moves that Ackman said the full board should have been consulted on include the hiring of Debra Berman from Kraft Foods Group Inc. (KRFT) as senior vice president of marketing, which was announced earlier this week.

Personnel Moves

Ullman also fired Sergio Zyman, a former Coca-Cola Co. advertising executive, who had been brought in as a marketing consultant in February, and pushed out Senior Vice President of Operational Strategy Bob Peterson, Ackman said. He said he was told Vice President of Financial Planning and AnalysisSusan Ray was fired.

A message left on Ray’s voicemail wasn’t immediately returned, nor was an e-mail to Peterson and a message with Zyman. Messages left for J.C. Penney spokesmen weren’t immediately returned.

The company considers the departures a matter for management, not the board, said a person familiar with the situation. Ray is leaving J.C. Penney after today to take a job at Carter’s Inc. (CRI), the children’s clothing maker, and Peterson left earlier this month, said the person, who didn’t want to be identified because the matter is private. Zyman, brought in by Ackman, was a consultant who left after his contract ended in June, the person said.

Board Dysfunction

Engibous said today that Ackman’s accusations of board dysfunction were “misleading, inaccurate and counterproductive.”

“The board is focused on the important work of stabilizing and rejuvenating the business,” Engibous said in a statement. “It is following proper governance procedures, and members of the board have been fully informed and are making decisions as a group. This includes the CEO search process, which is being conducted at an appropriate pace.”

The board agreed July 22 to begin a search for a CEO, to be named within six months, according to a person familiar with the matter, who asked not to be identified as the process is private. Ackman is pushing to find someone by mid-September since there are only a few candidates, the person said.

Among possible candidates for the next CEO are Foot Locker Inc. (FL) CEO Ken Hicks, Bon-Ton Stores Inc. chief Brendan Hoffman and Hudson’s Bay Co. (HBC)’s Bonnie Brooks, according to the person.

Executive Recruiter

Spokesmen for Foot Locker and Bon-Ton didn’t reply to requests for comment. Andrew Blecher, an outside spokesman for Hudson’s Bay, declined to immediately provide a comment.

J.C. Penney has hired executive recruiter Heidrick & Struggles International Inc. (HSII) to assist with the CEO search, according to a person familiar with the process who asked not to be identified because the details are private.

Ackman, 47, told board members in a letter yesterday that he persuaded former J.C. Penney CEO Allen Questrom to agree to return as chairman if he approves of the department-store chain’s next CEO and said today that Questrom may return even before one was chosen.

“J.C. Penney is at a very critical stage in its history and its very existence is at risk,” Ackman said in today’s letter. “During a period like this one, it is absolutely critical that we work together to solve our problems. It is essential that our board function extremely effectively or we will certainly fail.”

Permanent CEO

Perry Capital founder Richard Perry said today in a letter to J.C. Penney’s board that it should name Questrom chairman and choose Foot Locker’s Hicks for CEO.

J.C. Penney shares, which dropped 5.8 percent to $12.87 at the close in New York, have slid 35 percent this year.

Questrom, 73, criticized J.C. Penney directors for moving too slowly to find a permanent CEO after rehiring Ullman. He said he had supported Ullman as interim CEO and had expected the board “to use the time that Mike afforded them generously to find a person who was long term.”

In an interview yesterday from Aspen, Colorado, Questrom called returning as chairman “a long shot,” hinging on directors forming “a positive board and an aggressive board to help solve the problems.” He also said he’d return only if the board hired a new CEO who had previously served as a chief executive and had retail experience, preferably with department stores.

‘Restoring Confidence’

Ullman, who had served as J.C. Penney’s chairman and CEO for about seven years, has the board’s support.

“Mike is the right person to rebuild J.C. Penney by stabilizing its operations, restoring confidence among our vendors, and getting customers back in our stores,” Engibous said in a statement yesterday after the market closed. “He has the overwhelming support of the board of directors, and we are confident the company is in good hands.”

Since taking over, Ullman has been trying to woo back middle-aged women, the chain’s core customers, who decamped when Johnson changed the merchandise mix to attract younger shoppers and reduced discounts. Ullman has revived so-called “doorbusters” bargains usually reserved for the holiday-shopping season.

New Marketing

Marketing has been refocused on bargains and private-label lines like St. John’s Bay, a $1 billion brand whose women’s apparel was discontinued under Johnson. The company is bringing back three other brands popular with older, female shoppers: the lingerie line Ambrielle, outdoor-apparel Made for Life and JCP Home.

Ullman also has labored to shore up J.C. Penney’s cash balance. Along with hiring AlixPartners in April, the company started negotiating a $2.25 billion loan arranged by Goldman Sachs Group Inc. and borrowed $850 million from a revolving credit facility.

J.C. Penney isn’t Ackman’s first foray into retail. He raised a $2 billion investment vehicle in 2007 that bought a stake in Target Corp. (TGT) that lost 90 percent of its value over the next two years. At the time, Ackman called it “one of the greatest disappointments” of his career. Pershing Square sold its Target stake in the first quarter of 2011, after shareholders rejected a board slate nominated by Ackman.

Unusual Move

Ackman’s sudden outburst of criticism of his fellow J.C. Penney board members is unusual, said Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware.

“Given the fact that he has been so involved with directors for some time now and was involved heavily in hiring the last CEO, it’s very surprising he’s launched such a public dispute,” Elson said.

Pershing Square International Ltd., the firm’s largest fund at $4.9 billion in assets, rose 3.7 percent this year through July, according to a performance update sent to clients. U.S. stocks returned 20 percent and hedge funds on average gained 3.2 percent in the period, according to data compiled by Bloomberg.

To contact the reporters on this story: Beth Jinks in New York at bjinks1@bloomberg.net; Lauren Coleman-Lochner in New York at llochner@bloomberg.net; Stephanie Ruhle in New York at sruhle2@bloomberg.net

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About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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