Estimating Ackman’s Odds of Success at His Next Target

As the activist investor William A. Ackman hunts for his next target, a favorite guessing game on Wall Street is to see what company he will pick next to agitate for change.

According to news reports, Mr. Ackman has been raising a new $1 billion fund in recent weeks and will soon announce where he is placing his bet. The latest speculation has centered on ADT Corporation, the alarm company, and the shipping giant FedEx.

Mr. Ackman and his hedge fund, Pershing Square Capital Management, have never shied away from a good fight. He successfully pushed for leadership change at Canadian Pacific Railway in 2012 and hasn’t been afraid to take on giants like Procter & Gamble.

Despite notable successes over the years, he encountered obstacles in a recent run at Herbalife, which he calls a pyramid scheme. He has also been stymied in his efforts to rehabilitate J.C. Penney.

Mr. Ackman, however, would have to deploy very different strategies to pursue ADT or FedEx, according to Rotary Gallop, a firm that analyzes shareholder ownership and influence.

According to Rotary Gallop, ADT presents the better opportunity to swoop in and take control, take the company private or force changes on its management. The firm estimates that an activist investor would be about 1.5 times as likely to succeed in forcing change at ADT than at FedEx.

For that reason, analysts have already discounted the likelihood that FedEx is Mr. Ackman’s target.

On the face of it, a $1 billion investment appears significant. Leverage could stretch those funds even further. But dig deeper, and it’s clear that even a stake that large doesn’t amount to equal influence at every company.

One big reason is that some companies are dominated by a few big shareholders, while others are owned by a multitude of small investors. In an extreme case, one shareholder might own 50 percent or more of a company’s shares, giving him or her essentially complete control. Even minority shareholders can dominate, if they are allied with others or with management.

But in a company that has a lot of smaller investors, an activist investor has a much better chance of pushing an agenda.

Rotary Gallop analyzed what would happen if a shareholder bought a significant stake in a company – say, 14 percent or $2 billion worth — a large enough investment to create critical mass at many firms.

To get 14 percent of ADT, an investor would need to buy about $1.3 billion worth of shares. Since FedEx is a substantially larger company, Rotary Gallop assumed a $2 billion investment, or 6 percent stake, would be large enough to create critical mass.

Rotary Gallop then ran thousands of computer simulations, evaluating how often that investor would win a proxy contest given the various possible voting outcomes by each company’s investors.

In the case of ADT, an activist investor would cast the swing vote about 89 percent of the time, which represents significant influence in any proxy contest.

At FedEx, a $2 billion stake would be decisive just 50 percent of the time — long odds for such a big s—ke in the world of investing. If Mr. Ackman really wanted to ensure influence, it would take a lot more capital (about $4.6 billion for a 14 percent investment, at recent prices).

Moreover, insiders – who are likely to oppose a bid by an activist investor — control more of FedEx’s shares, compared with ADT’s.

There are more skewed comparisons. For example, an activist investor would have essentially zero chance of prevailing at Wal-Mart Stores without the Walton family’s cooperation. At a company like Apple, where $2 billion does not buy much and insiders also are hugely influential, an activist’s odds would be quite small.

The Rotary Gallop analysis of Mr. Ackman’s potential targets is purely statistical. Shareholder votes could easily be swayed by other factors, like the popularity of current management or alliances among big shareholders.

Mr. Ackman could certainly choose a Standard & Poor’s 500 company other than ADT or FedEx to target. His odds of success in forcing change elsewhere are likely to be better than at FedEx but not as good as at ADT, depending on factors like insider influence and the size of large shareholder stakes.