At first glance, Bill Ackman seems like a hypomania, passively attempting to righteously avenge financial fraud with his save-the-world complex. These days, his goal is to mete out as much of the world’s capital to himself so that he can return it in an altruistic way. “And if I don’t do it, who will?” he says.
On December 19, 2012, Bill Ackman declared an inimical war on Herbalife. During a three-hour ‘public short’ presentation spanning 342-slide webcast presentation at a 500-seat auditorium at the AZA Equitable Center in Midtown Manhattan, he excoriated the company as a “fraud,” “a pyramid scheme,” that causes “enormous harm to the most vulnerable communities.” He called the company a “modern day version of a Ponzi scheme” that should be shut down by federal regulators. The final death blow came when he revealed he had a billion dollar short position and said his target price for the stock was zero. By the following Monday, Christmas Eve, Herbalife stock bottomed 42%, from $41.57 to a low of $24.24, with the company having lost close to $2 billion in market value.
The most recent blitz on Herbalife, which came out on February 9, 2016, has become the bust of the winter amid imploding oil loans and banks blowing up. Couching the dog and pony show as a play for “social justice,” Pershing Square Capital Management has released a webcast entitled “The American Dream Denied” as the ultimate knockout punch. The documentary, shows former Herbalife low-income recruits tearfully losing their homes, relationships with friends and family members because of the money petered out into Herbalife storefronts and products, leading to problems from overwhelming debt to bankruptcy.
What a time to be Bill Ackman.
In recent years, with consumer advocates protesting pyramid schemes, several market leaders including Tupperware in 2006, and Avon in 2014 have quit the Direct Sellers Association. Herbalife, on the other hand, has been handed a staying power, much of is attributed to hedge funds betting on the opposite site of Ackman. Billionaire investor Daniel Loeb bought an 8.9 percent stake in the tainted company calling it a “compelling long-term investment” only to dump all his shares for a hefty profit two months later. During that time, activist investor, Carl C. Icahn, bet against Ackman with more than 13 percent stake in Herbalife to turn the game around in a long high-profile, 10-year-old acrimonious battle between the two heavyweights, as Wall Street spectators enjoyed watching the two of them rise and fall, and kiss and make up.
William A. Ackman, now 49, the salt-and-pepper-haired, six-foot-three, lean, self-assured, media-savvy hedge-fund titan with cerulean eyes, cuts an intimidating presence. He rowed crew at both Harvard College and co-captained the Harvard Business School rowing team. The fabulously wealthy – with the most expensive penthouse duplex in Manhattan at $92 million – has a guileless magnetism, but when he spits out words with a flesh-tearing incisiveness at steroid-packed presentations, you get a glimpse of an uncharacteristically taciturn psyche.
Ackman’s foundation, Pershing Square Management, has harvested 21% average returns (a market-beating figure) since its inception in 2004, until 2014. Last year, its portfolio dropped 20.5%, net fees when the S&P 500 delivered a total return of 1.4%, including reinvested dividends. This comes after the hedge-fund made a name of itself in the Wall Street for commanding nearly $19 billion in assets, and crushing the returns of the stock market for its investors. With the head honcho’s controversial and some of the biggest, ill-fated bets on companies like Valeant, Fannie Mae, and Canadian Pacific, Pershing Square has lost billions.
In a business where historical trades provide credibility and success begets success, Ackman seeks to defy tradition in hopes of leveraging his failures to unfold his success.
Sure, Ackman’s conspicuous success speaks for itself. The most successful investor may be highly competitive, but he is fallible. In high school, he famously wagered his father $2,000 that he’d score a perfect 800 on his verbal SAT. His father let him off the hook the night before, and he scored a 780. In 2012, Ackman joined several hedge fund biggies and serious cyclists partake in a 26-mile Hampton’s bike ride. Although out of practice, he silver-haired hedge fund mogul rushed out in front at an unstoppable pace.
Fresh out of Harvard Business School in 1992, Ackman and his friend David P. Berkowitz cobbled up $3 million to start a hedge fund, Gotham Partners. At Gotham, Ackman developed methods that he would use again and again, leaving no margin for error. Amid corporate filings and the hunt of undervalued companies, Gotham started its first hostile proxy fight against a real estate company, First Union Real Estate. It took months of scuffling before Gotham triumphed.
The once highflying Ackman, struggled to right the First Union, including a paltry attempt to merge it with Gotham Golf, another company under Gotham’s wings. Investors started to voice concerns as the agency took a white-knuckle ride amid financial losses and dwindling reputation.
More than a decade later, Gotham Partners, fizzled out in late 2002 after some illiquid investments left him unable to rebound from an increasingly dire situation. The key moment was when he lost big stakes on J.C. Penney, Borders, First Union Real Estate, and Target, behind poorly timed investments on activism and installing new leadership.
His critics agree that his theatrics, oversized ego and big mouth in the hedge fund world makes him stand out. Others warn that his fund has the risk of blowing up. His portfolio is made up of bigger, riskier bets on a dozen or so companies.
One cannot deny that at Gotham, Ackman developed a technique he would use again and again over the years. He went after big targets, took his battles out in a theatrical setting with bombshell announcements where it’s less about words and more about the action. This method proved useful when he made his first foray into activist short-selling in 2002. He released a conscientiously researched paper condemning the management and reserve levels of the Federal Agricultural Mortgage Corporation. Within six months, Farmer Mac’s stock had dwindled, paving the way for a quick gold rush for Gotham, which had sold its stock short. Bond insurer MBIA was up on the bull’s eye as Ackman made a long bet, which finally paid off during the financial crisis of 2007.
Undeniably, Ackman has an enviable record. The head of the $14 billion hedge-fund was named to top dog in Forbes and Bloomberg’s 2014 ranking of the world’s best hedge fund managers. Pershing Square generated around 40% returns, fueled by a big and bold bet on Allergan, the maker of Botox, which ended up accepting a $66 billion hostile takeover bid from Actavis. While his short bet against Herbalife hurt him badly in 2013, it reversed itself and bolstered his hedge fund’s returns in 2014. Pershing Square also raised some $3 billion in fund listing ahead of its IPO on Euronext Amsterdam. While a majority of hedge funds were seen struggling in 2014, Ackman further distinguished him.
Unlike conventional bigwigs AKA, some of the world’s greatest investors like Carl Icahn, Dan Loeb, and Nelson Petlz who buy shares and then create a plan to fix a company, Ackman, by contrast would annihilate a company. People like him who bet against companies have long been vilified because they seem to be trying to do harm. If Pershing Square did not have a concentrated financial incentive to investigate Herbalife, we would know a lot less about the company today.
A few see it as an act of pique, but then again, not everyone can see the Ackman mojo.
Ackman isn’t going after Herbalife because it sold weight-loss shakes. His issues stemmed from its being a multilevel marketing company or MLM. If Herbalife collapses, the bond king promised to donate his cut to charity, because he considers any proceed from a corporation so villainous to be “blood money.”
Sure, he expects the stock not just to decline, but to go to zero, he made clear. In recent years, Herbalife shares have lost about a fifth of their value, as news has spread that regulators are investigating whether the company broke the law.
After all, Herbalife has a $2 billion brand without advertising. Multilevel marketing, where your friends and families become sellers, instills an inherent trust that helps companies drive sales. These types of programs are not prevalent among people of higher economic class; largely a game that most Wall Street executives have no connect with in their daily lives. There are thousands of MLM businesses all over the globe and the industry boasts annual global revenues of more than $180 billion.
If the Federal Trade Commission will step in and declare the weight-loss company tied to a social dynamic to be a pyramid scheme, they will shut down its business in the United States and send the stock price to zero. And so, this could be the shortest and most hostile short of all time.
Some call this blatant market manipulation.
The legendary activist investor, often called ‘the next Warren Buffett,’ doesn’t intend to finish this game soon. In an interview on CNN, Ackman reminded how long he’s willing to “sit on this bet?”
Ackman replied, “We’re not sitting. We’re shouting from the rooftops. They’ve never had someone like me prepared to say the truth about the company. I’m going to the end of the earth. If the government comes out and determines this is a completely legal business, then I will lobby Congress for them to change the law. I had a moral obligation. If you knew that Bernie Madoff was running a Ponzi scheme, and you didn’t tell anyone about it, and it went on for 33 years.”
In 2015, Pershing Square battered with a 20.5% loss after Valeant Pharmaceuticals. It illustrates how volatile the activist investor’s returns can be after he netted a triumphant 40% in 2014. In a year-end letter from Pershing Square, addressing the hedge fund’s peak-to-trough decline, Ackman did not blame the unfair force of gravity in the volatile world of hedge fund. “I have often stated that in order to be a great investor one needs to first have the confidence to invest without perfect information at a time when others are highly skeptical about the opportunity you are pursuing. This confidence, however, has to be carefully balanced by the humility to recognize when you are wrong,” he wrote. “While no one here is enthusiastic about delivering our worst performance year in history in 2015, it certainly does a good job reinforcing the humility-side of the equation that is necessary for long-term investment performance.”
Humility, you say?
“Fortunately,” he winds up, “the lessons we have learned in 2015 should be easy to avoid in the future.”
Presumptuousness took us to the grave in 2008. But if you’re Bill Ackman, your Superman complex might get us out of it. Ackman doesn’t acknowledge defeats. It’s his benign air is what makes his resilient yet effective brand of activist investing that gets to critics. He reverberates tension with an almost terrifying froideur. Every bet he contests is with implicit aplomb. No hedge fund manager or investor will be able to replicate hos mojo for at least a score.
All told, Bill Ackman carries more weight than he did before.
(Image Credit: Insider Monkey, www.insidermonkey.com)