Monday, April 23, 2012

New Ackman Letter to CP Shareholders

April 23, 2012
Dear Fellow Shareholder,
In his 2001 Canadian Pacific letter to shareholders, then CEO Robert Ritchie wrote:
"Our profitability in 2001 was second-best in the industry based on operating ratio [78%], but I don't intend for CPR to be the perennial silver medalist."
Regrettably, these words proved only too prophetic. Canadian Pacific is no longer the silver medalist, as its operating ratio has deteriorated while the operating ratio of the other Class I railways has improved materially. CP's negative 18% total return to shareholders during CEO Fred Green's tenure[1] reflects its position as the worst managed and poorest performing Class I railway.
The cost to shareholders of CP's poor board oversight and mismanagement has been enormous. If you invested $10,000 in Canadian Pacific when Mr. Green became CEO, you would have lost $1,800 and be left with only $8,200 (including dividends) as of the day prior to Pershing Square's investment in CP. Alternatively, if you invested $10,000 in a portfolio of the other Class I railways over the same period, you would have $15,900, nearly twice as much.
Mr. Green recently suggested that the 65% appreciation of CP's shares since Pershing Square began accumulating stock in the Company reflects confidence in management and the incumbent board. In fact, this appreciation reflects the increased probability – estimated by the top-ranked railroad industry analyst, JP Morgan's Tom Wadewitz, at 90% – that the current board will be restructured and Mr. Green replaced.
As they have in prior years, the current board and Mr. Green again ask shareholders to believe that sustainable progress is just around the corner. Unfortunately, the first quarter's results serve only to remind us of why we shouldn't. After six years of promises and "detailed plans," the Company's performance is worse than it was in the comparable quarter in 2006, just prior to Mr. Green becoming CEO, despite the benefit of a strong tailwind from this year's record mild winter. The link below is a chart showing the lack of progress over Mr. Green's tenure (lower is better):
(Photo: )
To distract attention from the lack of progress during his tenure, Mr. Green compares Q1 2012 performance with even worse performance in Q1 2009, 2010 and 2011. But Q1 2012 performance benefitted from a strong tailwind (the record mild winter) while Q1 2009-2011 performance was weakened by strong headwinds (the recession and a harsh winter). The relief from headwinds and the benefit of a tailwind should not be confounded with "successful execution," yet Mr. Green seeks to do just that. The incontrovertible fact remains: under the stewardship of this board and Mr. Green, CP's performance has deteriorated.
The Board and Mr. Green recently blamed fuel price increases for the deterioration in the Company's operating ratio since 2006. Like their other excuses, this one rings hollow. While CP's operating ratio deteriorated from 79.6% to 80.1% during Mr. Green's tenure, the operating ratio of the other Class I railroads – which experienced the same fuel price increase – improved, on average, from 77.9% to 71.4%.
The Board and Mr. Green attempt to divert shareholders' attention from the Company's poor financial performance to "improvements" in non-GAAP, non-financial operating metrics. These metrics are distorted by the material benefit of a record mild winter and the outsized capital and operating expenditures of the Company's wasteful 2012 Winter Plan. Such expenditures destroy value and harm shareholders, but they can make selected operating metrics look better. Absent an accompanying record of improved financial performance, improvements in non-financial operating metrics cannot support a conclusion of sustainable progress.
Our Goal
The Nominees for Management Change have one simple goal: to restore CP to its rightful position as one of the best performing railways. A well-run CP will deliver enormous value to shareholders, substantially improve customer service, and earn back lost market share. We are highly incentivized to succeed: the Nominees for Management Change collectively own more than $1.8 billion of CP stock.
The incumbent board and management have failed shareholders, employees and customers. Their failed stewardship of CP and indifference to concerned shareholders make it clear that nothing less than a fundamental board restructuring and a new CEO will put CP back on track. This is precisely what the seven Nominees for Management Change will accomplish if elected with a strong mandate for change.
The shareholder vote at the May 17th, 2012 Annual General Meeting is a referendum on the incumbent Board's performance and an opportunity for shareholders to set CP on track to a better future. If you have not already done so, please vote the BLUE proxy FOR all seven Nominees for Management Change, and WITHHOLD from all 15 incumbent directors. Doing so maximizes the probability that all seven Nominees for Management Change will be elected, and delivers a mandate for new leadership at CP.
Please visit There you will find our shareholder communications and have an opportunity to submit your comments directly to us.
William A. Ackman

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