Valeant Pharmaceuticals' 47 percent plunge Tuesday means it's a rough day for a lot of hedge funds. But for Bill Ackman, what will be harder than reversing those stomach-churning losses is trying to repair the damage done to his reputation as an investor.
It's not just that he was wrong about Valeant -- many were, despite plenty of early signs that the drugmaker's strategy had flaws. It's that he insisted and insisted that everybody else was missing the point, stubbornly clinging (and adding) to a sour investment and advocating for others to join him.
Believing in an investment case is one thing, and that's at a hedge fund manager's discretion. Publicly rallying for support in the face of troubling facts and much uncertainty is another. Once you take that pulpit, the added responsibility shouldn't be taken lightly. Most of the well-known activist firms have focused on suggestions for how to make a company a better investment, occasionally fighting boards to effect such changes. Ackman instead fought other investors and analysts about Valeant, the way he's done at Herbalife. He's been betting against Herbalife, which sells nutritional supplements and weight-loss shakes, calling it an illegal pyramid scheme. But the stock has risen 60 percent in a year.
Since his Pershing Square Capital Management filed a 13D for its Valeant stake about a year ago, the stock has lost more than three-quarters of its value. That kind of return puts it in the company of battered oil stocks with solvency concerns. Tuesday's drop alone wiped out hundreds of millions from Ackman's investment.
In November, Ackman said his biggest regret was not buying more Valeant shares. Then, after Pershing Square suffered its worst annual net loss in 2015 (a 20.5 percent drubbing) he gave investors whiplash, writing to them about "humility" and being able to "recognize when you are wrong."
Of course, Ackman has had some successes, too -- most notably Fortune Brands. Shareholders did well after he successfully pushed for a breakup of the company that led to acquisitions of both its former Titleist golf unit and Beam bourbon business. And as recently as 2014, he sat atop Bloomberg Markets magazine's ranking of the best-performing large hedge funds.
But it also wasn't so long ago that he led a disastrous campaign at J.C. Penney. An analysis I did in 2014 of stocks targeted by activists in previous years found that Ackman's time at J.C. Penney proved the worst of the lot. After he joined the company's board in 2011 and chose Ron Johnson -- the guy behind Apple's stores -- to become its new CEO, the retailer rolled further downhill. And it never really came back, even after Ackman left and Johnson was fired. Bloomberg Businessweek said J.C. Penney was reeling from post-traumatic stress disorder from the ordeal.
As for Valeant, after the drugmaker cut its 2016 forecast on Tuesday morning and said it risks breaching some debt covenants if it can't file its annual report in time, Ackman put out a statement reminding investors that Steve Fraidin, Pershing Square's vice chairman, joined Valeant's board last week. He said the firm would take a "much more proactive role at the company" to protect its investment.
"We continue to believe that the value of the underlying business franchises that comprise Valeant are worth multiples of the current market price. Getting to those values, however, will require restoration of shareholder confidence in the management and governance of the company."
The problem with Valeant is that even if Ackman is right that it will come back from the accounting issues, there are the matters of its debt and M&A strategy. The serial acquirer says it's going to focus on paying down debt, which it needs to do. However, that means the impressive growth it achieved through dealmaking that had once made it so attractive to investors is probably a thing of the past. It won't be the same company that Ackman was drawn to.
The next time he's running an activist campaign, shareholders may be hesitant to ride his coattails. If he turns out to be wrong, will he be willing to admit it and pull out? Or will hubris trump humility?
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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