It was recently reported in a Reuters article that Pershing Square Capital Management, a well-known activist hedge fund, may have bought up to 5 million shares of Sears Holdings (Nasdaq:SHLD). Pershing's manager, William Ackman, disclosed the holding during a speech at a recent charity event. (To read the full article see "Sears Holdings stock rises on Ackman Stake".)

Now for those of you who haven't heard of William Ackman or Pershing Square, you soon will. The firm has a history of taking sizable stakes in well-known companies and then trying to influence management and the board to make moves to enhance shareholder value. Recently, the firm has been active in trying to persuade Target (NYSE:TGT) to sell off its credit card assets as a means of raising capital and its stock price.

What Does Ackman See In Sears?
Obviously I can't speak for the man or his firm, and as a hedge fund, it is unlikely to reveal its intentions. However, assuming the reports of his holdings are true, I suspect that Ackman sees a company with valuable assets that he believes are not being fairly valued by the Street. And I further suspect that he wants to act and try to help turn around the company and ultimately unlock some of that pent up value.

The only question is how he plans to open the lock. In addition to revealing his stake in the company, Ackman also said he was thrilled with the efforts of Eddie Lampert who heads up Sears. It doesn't sound like Ackman is about to go toe-to-toe with Lampert and the board.

What Is Ackman's Plan?
Despite his reported satisfaction with Lampert, I think he could push the board to rid the company of its Kmart holding. I think Kmart is weak compared to Wal-Mart (NYSE:WMT). I also think that Ackman could push Lampert to combine with another entity. As I've said in the past, I think Home Depot (NYSE:HD) is a possible fit given the overlap in appliances. Think of the potential leverage these two 800-lb gorillas could have over their suppliers or with regards to distribution!

A third option is that Ackman and Lampert may work together to take the company private. The company could probably save a small fortune by operating as a private company; it would save on all of those filings with the SEC and the exchanges. Finally, there is a chance that Ackman could be just along for the ride as an investor. I don't think this is likely the case, but we have to keep it in mind as a possibility. (To learn more, see How does privatization affect a company's shareholders?)

The Bottom Line
While I feel that Ackman and his crew can be a little rough around the edges, I think they do have shareholders' best interests in mind. Their involvement in the stock should be viewed largely as a positive.

However, personally, I'm not crazy about Sears as an investment right now. There are just too many loose ends to the story, but I suspect Ackman could help to tie some of those loose ends and ultimately make the company more attractive to other investors. Overall, it's a tough call.

To learn more about the activities of the activists, check out Activist Hedge Funds.

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