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NY Times, Oct. 29 2014
Bill Ackman and His Hedge Fund, Betting Big
By ALEXANDRA STEVENSON and JULIE CRESWELL
William A. Ackman, the silver-haired, silver-tongued hedge fund mogul,
gestured out the window of a 42nd-floor conference room at Pershing
Square Capital Management in Midtown Manhattan. The view was
spectacular, but Mr. Ackman’s arm extended not downward, toward the
vibrant fall foliage of Central Park, but skyward toward the top of a
glittering glass building just around the corner on 57th Street.
He was pointing toward One57, a new 90-story, lavish hotel and
condominium building described by one critic as “a luxury object for
people who see the city as their private snow globe.” Specifically, Mr.
Ackman was referring to the penthouse apartment. Named the Winter
Garden, for a curved glass atrium that opens to the sky, it is a
13,500-square-foot duplex with an eagle’s-eye view of the park.
And it will belong to Mr. Ackman. When the sale closes, the reported $90
million price would be the highest ever paid for a Manhattan apartment.
It is, he explained, “the Mona Lisa of apartments.” Never will there be
another like it.
But Mr. Ackman, 48, doesn’t intend to live there. He lives at the
Beresford, off Central Park, with his wife and daughters. The Winter
Garden is just another investment opportunity for him and a few others.
“I thought it would be fun,” he said, “so myself and a couple of very
good friends bought into this idea that someday, someone will really
want it and they’ll let me know.” Maybe he will hold some parties there
in the meantime.
Whether it’s a top-of-the-world apartment, an attack on a company or
even his annual vacations with friends (the next trip is Navy SEAL
training), Bill Ackman does everything big.
And this may be his biggest year yet. Overseeing more than $17 billion,
his hedge fund is up 32 percent in a year when many other hedge funds
are just breaking even. He recently completed a public offering of stock
in Europe of part of Pershing Square, and while the shares are trading
below the offering price, he still raised $2.7 billion that he can use
to make more big bets. He’s also a driving force behind one of the
biggest — and certainly the most controversial — potential mergers of
the year: Valeant’s $53 billion hostile takeover bid for Allergan, the
maker of Botox.
His critics agree that he’s big. They say he stands out for his big
mouth and oversize ego, an accomplishment in the hedge fund world. (Even
back in high school, his tennis teammates presented him with a T-shirt
that read: “A closed mouth gathers no foot.”) Others warn that his fund
has a risk of blowing up. His portfolio is made up of bets on less than
a dozen companies. (The Allergan stake alone made up 37 percent of his
fund earlier this fall, according to filings.) That means when things go
bad, they can go really bad. That’s what happened when his $2 billion
bet on Target through a separate fund lost 90 percent of its value at
one point.
He has wagered $1 billion that Herbalife, the nutritional supplement
company, will fail. So far, that bet hasn’t panned out, and even one of
his closest advisers has called his theatrics on the subject — including
a teary, three-hour rant this summer in front of nearly 500 people — a
mistake.
But on that crisp fall morning at Pershing Square, Mr. Ackman was
uncharacteristically taciturn. Reserved, even. Or maybe he was just a
bit annoyed.
When asked if he has had to make bigger, riskier bets as his fund has
grown, he answered, a bit petulantly: “We certainly have to make bigger
investments, that’s definitely true. But not riskier investments.” Asked
about failures, like the Target bet, he sighed deeply. “Target was a bad
investment,” he said, “but out of 30 investments, I don’t know of
another investor with as high a batting average.”
He certainly has an enviable long-term record: His funds, excluding the
Target and four other separate funds, have returned 21 percent net of
fees over 10 years, annualized. He has achieved it by going on the
offensive. Mr. Ackman’s role as an activist hedge fund investor is to
persuade other shareholders that he knows how to run companies better
than current management does. This involves research, argument and,
perhaps most important, a sensitivity to how every pronouncement and
gesture will be perceived.
“I was angry at Carl Icahn for many years, as you know,” Mr. Ackman said
of the longtime activist investor, when asked if he holds grudges. He
swiped at his eye and added, lest the movement be misinterpreted: “My
eye is tearing. It’s not emotion. I have a clogged tear duct.”
His attention to detail and persuasive powers will be especially
important come December, when Allergan shareholders hold a special
meeting. Mr. Ackman will urge them to replace a majority of the
company’s board and to pave the way for approving the takeover by Valeant.
It’s a high-stakes move. And Mr. Ackman is all in for a big win. He is
intensely competitive about everything, from memorizing two-letter words
for Scrabble games to, as it turns out, owning apartments.
“It’s one of a kind,” he said of his trophy penthouse. “By the way,” he
added, nodding down the street where other luxury towers are expected to
be built, “these other buildings are not going to be as good.”
Commanding the Room
All successful people have stories to tell about what allowed them to
achieve fabulousness. There is usually a moral. In the story that Mr.
Ackman likes to tell, the moral is this: Never doubt Bill Ackman.
During his freshman year at Harvard, Mr. Ackman happened to read the
application essay of the guy in the room next door. It was about why he
hated Smurfs. Mr. Ackman thought it was really good, and an idea formed.
He would write a book on how to write a college essay, drawing on
examples and interviews with Ivy League admissions officers. On the
advice of a family friend, he broadened his book to include information
on college admissions and sent it off to publishers. The rejection
letters piled up. He dropped the idea.
Later, two guys from Yale wrote a similar book called “Essays That
Worked,” which would be featured in a New York Times article.
“I suffered extreme psychological torture,” Mr. Ackman recalled. The
advice that the family friend gave, he added, had been bad. “I said, the
next time I have a really good idea, I’m not going to listen just
because someone is older than me.” Mr. Ackman continued, “It’s not going
to stop me from going forward.”
Fresh out of Harvard Business School in 1992, Mr. Ackman went to work
for his father, Lawrence Ackman, at his commercial real estate brokerage
firm, Ackman-Ziff. But the young man was impatient. After just one week,
and shrugging off advice that he first work for a veteran hedge fund
manager, Mr. Ackman convinced his Harvard buddy David P. Berkowitz to
start a hedge fund.
Cobbling together $3 million, the two started Gotham Partners. In a tiny
office, they pored over corporate filings, hunting for undervalued
companies. In 1998, Gotham started a hostile proxy fight against a small
Ohio real estate holding company, First Union Real Estate Equity and
Mortgage Investments. It took months of tussling before Gotham prevailed.
At Gotham, Mr. Ackman developed the methods he would use again and
again. He went after big targets and took his battles into the public
arena. Those techniques proved especially useful when he had sold short
a company’s stock, betting on a collapse on the stock price.
His first foray into activist short-selling was in the spring of 2002,
when he released a 48-page, scrupulously researched paper criticizing
the management and reserve levels of the Federal Agricultural Mortgage
Corporation. By that fall, Farmer Mac’s stock had tumbled, producing a
quick win for Gotham, which had sold the agency’s stock short.
Mr. Ackman’s next short target, in late 2002, was the bond insurer MBIA,
which he argued had backed billions of dollars of risky financing. It
was a bet that would take years, hours of presentations to credit
agencies and regulators, and a Wall Street financial crisis in 2007
before eventually paying off when MBIA’s stock started to collapse. Mr.
Ackman’s bet was a huge success, netting just over $1 billion. But
Gotham’s days were numbered.
Over the course of several years, Mr. Ackman struggled to right the
troubled First Union, including an attempt to merge it with a failing
golf operator that Gotham also owned. Investors started to voice
concern. When a judge’s decision about the merger in late 2002 went
against Gotham, the partners decided to wind down. The once highflying
fund was done.
More than a decade later, Mr. Ackman accepts partial responsibility for
Gotham’s demise. The problem, he said, was not its investments, which he
argues ultimately paid off, but rather the strategy of investing in real
estate, which was hard to sell quickly when investors wanted their money
back. “I made a couple of strategic mistakes that, had I had more
perspective, I wouldn’t have made,” he said.
About a year after Gotham closed, Mr. Ackman reappeared with a new fund,
Pershing Square, and a $50 million seed investment from the Leucadia
National Corporation. There would be a new focus: activist investing.
At Gotham, he learned that he needed research and a story. At Pershing,
he perfected the skill of telling that story to an audience of
shareholders, corporate directors and the news media.
“He’s trying to create a theatrical setting where it’s not about the
words, it’s about the dynamic, the action,” said J. Tomilson Hill, chief
executive of Blackstone Alternative Asset Management, an investor in
Pershing Square.
He charged quickly out of the gate, persuading Wendy’s to divest itself
of the Canadian chain Tim Hortons. Then he got McDonald’s to sell some
of its restaurants and buy back shares. It became clear that when
Pershing Square announced a stake in a company, something big was going
to happen, and the stock moved.
“Bill commands a room. He’s a tall guy, a good-looking guy. He draws all
eyes to him when he speaks,” said Damien Park, the founder of Hedge Fund
Solutions, which consults on activist campaigns but has not worked with
Mr. Ackman. “Also, his ideas aren’t usually incremental in nature —
asking a company to distribute cash or clean up a balance sheet. They’re
usually quantum changes in a company.”
That was true of his 2007 mark on Target. In just two weeks, he raised
$2 billion for a special fund to invest in just one stock. He wanted
Target to sell its credit card business and restructure its real estate
holdings. Target sold off part of its credit card business, but
management disagreed with his real estate plan. Over the course of two
years, Mr. Ackman waged a $10 million campaign to replace board members
with himself and four others.
When shareholders voted against him in the spring of 2009, the defeat
stung more than his reputation. By then, losses amounted to as much as
90 percent, and many investors in the special Pershing Square fund,
including the fellow activist investor Daniel S. Loeb through his Third
Point hedge fund, had asked for their money back.
Mr. Ackman suffered another black eye a few years later with J. C.
Penney. He won a seat on its board in 2011 and handpicked Ron Johnson,
the head of Apple’s retail stores, to turn around the troubled retailer.
But the efforts were botched; the company went from being profitable to
losing $1.4 billion in 2013. Mr. Ackman resigned from the board in the
summer of 2013, selling his stake at an estimated loss of $473 million.
“Every time I see him,” said Mr. Hill at Blackstone, “I say: ‘Bill, do
me a favor. Stay away from retail.’ ”
Still, Mr. Ackman notched two of his biggest hits — General Growth
Properties and Canadian Pacific — over the same period, helping to
offset the reputational and financial losses from Target and J. C.
Penney. Pershing estimates that Mr. Ackman’s original $65 million
investment in General Growth, which operated commercial properties and
has been restructured into three businesses, is now worth $3.3 billion.
In Canadian Pacific, Mr. Ackman has so far tripled the value of his
original investment after replacing the board and forcing through a
turnaround.
His defenders argue that anyone with a fund as large as Pershing is
going to have the occasional blunder. “In this business, if you don’t
make mistakes, you’re either a liar or you don’t take many swings at the
ball,” said Leon Cooperman, the founder of the hedge fund Omega Advisors.
Last year, Mr. Ackman and some friends took a scuba-diving trip off the
coast of Myanmar. The sun was warm, the ocean calm, but even in this
idyllic setting, Mr. Ackman felt compelled to devise a competition he
could win. After surfacing from each dive, he checked his air gauge
against everyone else’s, to see who had used the least amount of oxygen
while diving. Using less oxygen suggested less stress, thus proving who
was least rattled under water. Mr. Ackman really, really likes to win.
“When we lost at tennis, always, on some fundamental level, he regarded
it as an aberration,” recalled Michael Grossman, his tennis partner in
high school.
Mr. Ackman had an upper-middle-class upbringing in the New York suburbs,
and he recalls plenty of rough-and-tumble arguments at home with his
parents and sister. “Let me win?” Mr. Ackman recalled. “That doesn’t
exist in my house. No one lets anyone win. Fight to the death.”
And if, at times, that means putting his fund and reputation at risk, so
be it.
“I think he is just prepared to live with the scrutiny and the calumny
heaped upon his head,” said William A. Sahlman, one of his professors at
Harvard Business School.
This year, Mr. Ackman made a rare move. It began with a meeting in early
February between him and J. Michael Pearson, the chief executive of
Valeant. Five days later, Mr. Pearson expressed his interest in buying
Allergan, the maker of Botox, and sought Mr. Ackman’s help, according to
Valeant’s regulatory filings. Mr. Ackman agreed and began buying shares
in Allergan through a unique partnership with Valeant later that month,
eventually building a $4 billion stake in the company. By April, Mr.
Ackman and Valeant had gone public with a bid for the company worth $47
billion. It went hostile.
“A hedge fund getting together with another company to buy out a
competitor?” said Alan Palmiter, a business law professor at the Wake
Forest University School of Law. “That’s definitely unusual. I can’t
recall ever seeing a hedge fund being part of an industry takeover.”
Allergan had stronger words for Valeant and Mr. Ackman. It rejected the
deal and warned shareholders that Valeant would squeeze the company for
profit and skimp on research. In a federal lawsuit, Allergan contended
that the Valeant-Ackman partnership was an “improper and illicit
insider-trading scheme hatched in secret by a billionaire hedge fund
investor.” The S.E.C. is now investigating. Pershing Square denies the
accusations.
The short-seller James S. Chanos, who predicted the fall of Enron, has
called Valeant’s accounting aggressive and joined the fight — against
Mr. Ackman.
While Mr. Ackman drew support from big Allergan shareholders — including
T. Rowe Price and Pentwater Capital Management, and proxy advisers like
Glass Lewis — for a special shareholder meeting in December to vote on a
new board, the clash has intensified. In early October, Mr. Ackman
provided a sometimes testy deposition for the Allergan lawsuit. (After
confirming that he had given depositions “a number” of times before, Mr.
Ackman added, “I love depositions.”)
Neither side shows signs of backing down ahead of the shareholder vote.
In court filings, Valeant and Pershing have accused Allergan of
providing false information about Valeant to shareholders. Allergan said
last week that it saw no evidence to support those claims. Valeant and
Pershing, meanwhile, have raised their offer twice and have signaled
they might raise it again in the next few weeks, to $60 billion.
‘A Sad Performance’
For three hours on a sunny day this past July, Bill Ackman ranted. He
raved. He brought up comparisons to Enron. To the Mafia. To the Nazis.
He cried.
He did this in front of an audience of nearly 500 people in a Midtown
Manhattan auditorium. He had billed this as the “most important”
presentation of his career, promising that it would be the “death blow”
against Herbalife, the nutritional supplement club that he has bet against.
It seemed to have the opposite effect. Throughout the jaw-dropping
exhibition, Herbalife’s stock rose higher, ultimately closing the day up
25 percent.
The presentation was so over the top that other hedge fund investors,
friends and even members of Pershing Square’s own advisory board quickly
labeled it a mistake. “It was one of the few times that I felt sorry for
Ackman, a guy who makes more in a day than I make in a year,” said Erik
M. Gordon, a professor at the Ross School of Business at the University
of Michigan. “It was a sad performance, and it was, minute by minute,
calling into question his judgment and credibility.” Mr. Ackman’s
theatrical sense had gone wrong; later, he told Bloomberg News that the
presentation “was a P.R. failure.”
Others feared the bet itself, which at one point totaled 10 percent of
Pershing’s assets. At least one investor had already redeemed his money.
“I’m sure we had some redemptions from people who were nervous about
Herbalife,” Mr. Ackman said in the Pershing conference room.
The head of a firm that invests in hedge funds, speaking on condition of
anonymity because he might someday invest with Mr. Ackman, said: “There
are two schools of thought on Herbalife. Bill thinks this is an outright
fraud that will be convicted. To take that big a bet for your fund and
your investors, I think it’s foolish.”
Even before the “death blow” presentation, Mr. Ackman had restructured
his bet against Herbalife. After discussions with investors and his
advisory board, he reduced Pershing’s exposure by 60 percent. But he has
spent $50 million just on research and legal fees for his campaign
against the company.
“Some of us might be surprised by how much he ventured — how much he got
into it — but I don’t think there is anybody on the board who thinks
that this is now a mistake,” said Martin Peretz, one of Mr. Ackman’s
professors at Harvard, who was an early investor in Gotham and serves on
Pershing’s advisory board. (Members of the advisory board each received
1 percent of the firm.) That Herbalife’s share price has fallen 34
percent this year helps, he added. Still, Mr. Ackman’s position will
start making money only if Herbalife stock falls roughly another 9 percent.
The Federal Trade Commission and the S.E.C. have opened inquiries into
Herbalife and its practices — in no small part because Mr. Ackman
lobbied regulators and lawmakers to encourage investigations. The S.E.C.
is also looking at Pershing Square and some of the investors who took
the other side of the bet.
Some hedge fund executives wonder whether Mr. Ackman has lost his
perspective on Herbalife, allowing it to become a personal vendetta.
“I think Bill has gotten very angry about what Herbalife is doing, and
the presentation made it very clear that it’s personal to him,” said
Whitney Tilson, a hedge fund manager and a longtime friend of Mr.
Ackman. “He wants to be vindicated for his personal reputation as well.”
Mr. Ackman argues that he maintains plenty of rational distance. When
asked if he could absorb any new information that might change his
thesis against Herbalife, he first nodded curtly. Certainly, yes.
But, unable to stop himself, he fell into a familiar refrain. “There’s
nothing actually that could prove that Herbalife is not a pyramid
scheme,” he said. “There’s nothing.”
Maybe Mr. Ackman is capable of changing his mind. Or maybe not. As for
Herbalife, he finished heatedly, “That’s a bad example.”
A version of this article appears in print on October 26, 2014, on page
BU1 of the New York edition with the headline: Over the Top. Order
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