William Ackman's Pershing Square Capital Management held a clinic on how to stalk a company as an activist investor, using J.C. Penney Co. (JCP) as the case study.

First, get as close as you can to the 5% ownership that triggers mandatory reporting, then wait for your moment and rapidly acquire all the shares you want within the 10-day window you have to disclose hitting 5% or above. That way, other investors won't have the opportunity to drive the price up before you've finished building the position.

Also, if you're interested in influencing your target, it helps to bring along a friend.

On Friday, Ackman surprised Wall Street, and sent Penney shares 3.3% higher, by disclosing a 16.5% stake in the department-store chain, having flown past the 5% threshold that triggers timely disclosure with the Securities and Exchange Commission. Pershing said it expects to have talks with Penney's management and board of directors, as well as other stockholders and "relevant parties." It said it would hold strategic talks on its Penney investment with entities affiliated with Vornado Realty Trust (VNO), a commercial real-estate giant that is landlord to Penney at no fewer than five locations, and said Vornado would be filing its own Penney ownership documents.

Ackman didn't immediately respond to emails seeking comment, but his moves could signal he's looking to succeed with Penney where he failed with Target Corp. (TGT), namely fomenting change and shaping the new direction of what some consider a staid retailer.

From Aug. 17 through Aug. 26, Pershing Square accumulated just under 11.6 million shares of Penney at an average cost of about $20.63 apiece, putting Ackman just below the 5% threshold requiring stake disclosure. There Ackman waited, undetected, for over a month while evaluating his target and contemplating the next move.

Then, on Sept. 28, the hedge fund negotiated an over-the-counter call option with a counterparty that allowed it to buy 4 million shares, between then and Dec. 27, at just $12.24 apiece. That took his potential ownership to federal filing territory. Pershing Square paid $12.86 apiece for these options, and because Pershing Square exercised them early it pocketed a fee that lowered the average exercise price to $12.04 apiece, making its total purchase price for those 4 million shares $24.90 apiece.

Ackman then, operating in secrecy under the 10-day window investors are given to file the appropriate initial ownership documents, went on a buying binge. From Sept. 29 through Oct. 7, he bought over 23 million more shares, including those obtained from exercising all of those negotiated call options, which brought his common-share stake to its reported level of 34.9 million shares. He paid a total of $880.4 million, or $25.21 a share, all told, according to back-of-the-envelope calculations based on his filings.

On Oct. 7, he also amassed listed call options to buy nearly 4.2 million shares at prices between $20 and $30, which brought his total potential stake to nearly 39.1 million shares, or 16.5% of Penney. Most of the options expire next May and the rest expire in January 2012; the weighted average strike price on the options is $26.23 apiece and he paid $22.6 million, or $5.45 apiece, for the right to buy the shares later.

These options are in the money at Penney prices ranging from $29.68 to $34.76 per share. The stock traded Friday afternoon at $32.67, up $1.03, on over five times the average daily volume.

Through cash-settled total return swaps, Ackman also has some small, added economic exposure to Penney that will pay him at Penney prices above $29.29 and cost him money below that. All told, Pershing Square paid about $903 million for its entire Penney position, and just his common stock alone is already worth over $1.14 billion following Friday's run-up on the news.

Ackman was also reported Friday to have taken an 11% stake in spirits and consumer products purveyor Fortune Brands Inc. (FO), which sent its shares up nearly 6%, although Pershing Square has yet to file any Fortune ownership information with the SEC.

-By Maxwell Murphy, Dow Jones Newswires; 212-416-2171; maxwell.murphy@dowjones.com
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