UPDATE 2-Pershing backs Ceridian bid, cites market woes

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By Svea Herbst-Bayliss

BOSTON, Aug 14 (Reuters) - Hedge fund Pershing Square, which for months fought an agreed-upon takeover bid for Ceridian Corp. CEN.N from Thomas H. Lee Partners and Fidelity National Financial Inc. (FNF.N), now supports the $5.3 billion buyout, the fund's manager said on Tuesday.

Recent credit market woes prompted Pershing Square, Ceridian's largest holder with 14.9 percent of shares outstanding, to change its view, fund manager William Ackman told the company's other shareholders.

Industry analysts said Pershing Square's move may signal that activist investors are having more trouble getting deals done at a time of increasing market stress.

But Pershing's decision does not end the long-running and often acrimonious battle between the New York-based hedge fund and the Minneapolis-based human resource and payroll company.

In an unusual step, Pershing Square, which rose to prominence by prodding corporations such as fast-food chains McDonald's (MCD.N) Wendy's (WEN.N) to change course, is pressing ahead with plans to replace all seven Ceridian directors with its own slate of experts.

Activist hedge fund investors typically try to win one or two board seats to gain influence over a company's management.

Ceridian said it welcomes Pershing Square's support for the negotiated takeover deal.

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Pershing Square has long said Ceridian is worth more than $36 a share, well above its closing price of $32.71 on the New York Stock Exchange on Tuesday.

To prove the point, Ackman hired bankers and lawyers who identified a number of potential rival bidders this summer. But when credit essentially dried up in the last weeks, spooked investors backed off so quickly that Ackman concluded that the deal on the table is better than no deal at all.

A "significant deterioration in the credit and broader markets has made other alternatives less viable and $36 per share more attractive," Ackman wrote in a regulatory filing.

"As a result, we fully accept the company's recommendation for the merger and intend to vote our shares in favor of it," he said in a letter filed with the U.S. Securities and Exchange Commission.

Pershing Square itself has not been affected by recent market woes that have left a number of the industry's best-known portfolios with heavy losses. For the year to date, Pershing Square has delivered returns in the mid-teens, a person familiar with the hedge fund's performance said.

In general, Pershing Square makes investments in safer, predictable stocks such as burger chains and department stores -- Ackman recently invested big in Target (TGT.N) -- which do not use a lot of leverage in their operations.

Because of its solid financial footing the fund can afford to press on with its proxy fight, giving other Ceridian shareholders like Janus Capital Management and Columbia Wanger Asset Management a choice at the Sept. 12 annual meeting.

Pershing Square has complained that Ceridian's board failed to boost shareholder value by failing to spin off the Comdata division and neglecting the HRS division. The fund also said the board overpaid managers who did not perform well.

By running the proxy contest, Ackman is signaling his displeasure with Ceridian's decision to hold the board election before the takeover deal closes and is essentially saying he does not want to be stuck with Ceridian's board for another year in case the deal collapses.