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J.C. Penney: Why Ackman’s Tantrum Will Kill the Company

J.C. Penney: Why Ackman’s Tantrum Will Kill the Company

For reasons not entirely clear hedge fund manager Bill Ackman is introducing more uncertainty into the J.C. Penney (JCP) situation. Ackman, who owns 18% of the company and is down roughly $600 million on the investment, is demanding that J.C. Penney find a new CEO in the next 30 to 45 days.

According to reports later confirmed by the company, Ackman told the board we need a CEO with extensive, ideally department-store retail experience, strong operational skills and a strong public company track record… we can’t afford to wait.

Ackman threatened to sell his stake in J.C. Penney if the company refused to meet his demands.

Related: J.C. Penney Can’t Be Saved: Najarian

It was an ironic, stunning, and deeply weird stance for Ackman to take considering his history with the company. It was Ackman who first pushed the J.C. Penney board to replace then CEO Myron “Mike” Ullman with former Apple (AAPL) retail boss Ron Johnson in 2011. During Johnson’s tenure J.C. Penney sales fell over 25% and shares were cut in half.

Suffice it to say the J.C. Penney board is unlikely to take hiring advice from Ackman regardless of his 18% ownership stake.

Firing back at Ackman in a letter late yesterday afternoon, J.C. Penney Chairman Thomas Engibous defended Ullman and accused Ackman of being “disruptive and counterproductive at an important stage in the company’s recovery.”

Liquidity Death Spiral

J.C. Penney inititially spiked on the report, apparently on the logic that anything was preferable to what J.C. Penney has been doing for the last two years. Upon further review it's becoming clear that Ackman may in fact have discovered the one worse idea. Replacing Ullman now introduces more uncertainty into J.C. Penney at a very bad time for the company.

J.C. Penney's credit line is at risk by some reports. If the company can't borrow it's as good as dead.

Ackman's demands are inexplicable on many fronts, not least of which being that his dumping the stock would likely be met with glee by the board. J.C. Penney shares are down more than 50% since Ackman got involved. Pushing them lower in a snit isn't the worst thing in the world from the board's perspective, and it's doubtful shareholders would disagree.

The guess here is Ackman is looking for a graceful exit from his position. He wants an excuse to leave and admitting he was wrong is unpalatable. "What's the classic out clause," Nesto says, pondering how Ackman might explain selling, "'my mistake was that I underestimated the stupidity of the board.'"

Ackman seems to want out at any price. The best thing that could happen for the company is that he follows through with the threat.

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