Bill Ackman's Soft Power

On Tuesday mornings, William Ackman, the founder and CEO of Pershing Square Capital Management, holds an investment meeting at his office overlooking Central Park in Manhattan. It was at one of these sessions several years ago that Ali Namvar, a senior analyst at his firm, brought up a company that interested his boss. It was called Fortune Brands (FO).

As Namvar described it to Ackman, Fortune Brands was a corporate platypus. At the heart of the Deerfield (Ill.) operation was a spirits division with bourbons such as Jim Beam, Maker's Mark, and Knob Creek. It also had a golf division that sold Titleist putters and drivers. And a "home and security" unit that made Moen faucets and Master Lock padlocks. This combination didn't make sense to Ackman or to anybody else in the room.

Afterward, Ackman read several of the company's annual reports and concluded that this old-fashioned and, more importantly, undervalued conglomerate was a piggy bank in need of a hammer. "We didn't think it was a logical structure," Ackman says. "The question was: When does it makes sense for these to become separate companies?" This was hardly an academic issue. Ackman's hedge fund has $9 billion under management, and he likes to take large positions in companies and agitate, sometimes publicly, for them to adopt his suggestions. He rarely gives up. "He is the most relentlessly stubborn person on the planet," says his friend Whitney Tilson, managing director of T2 Partners, another hedge fund.

Ackman, 44, isn't shy about taking his case to the media, either, if he feels he isn't getting the proper amount of attention. At 6 feet, 3 inches tall and with prematurely gray hair, he looks rather like a congressman. What really frustrates managers of his target companies is how charmingly he goes about his business, which makes it hard for them to paint him as a crank and brush him off.

Ackman waited quietly for five years. In October 2010, with Fortune's share price suffering from the collapse in the housing market, he bought 11 percent of the company's stock. Shortly thereafter, he placed a call to Fortune Brands Chief Executive Officer Bruce Carbonari. "We have some ideas," Ackman told him. "We'd love to meet you."

Ackman is mobbed at investor conferences. Bloggers pore over his investor letters when they appear on the Internet. Ackman denies posting them, but he seems to relish the publicity, which distinguishes him from many others in this secretive business. What some might see as an intrusion, he regards as a useful transparency. Along those lines, Ackman seems to be styling himself as the people's hedge fund manager. In March 2009, in a bid to become one of President Barack Obama's unofficial policy advisers such as BlackRock's (BLK) Larry Fink or Pimco's Bill Gross, he drew up a plan to rescue the country's banks after the financial crisis and offered it to Obama. Nothing came of it, but he was welcomed to the White House by then-National Economic Council director Larry Summers, who respectfully heard him out. "They certainly listened," Ackman says. The White House declined to comment.

As far back as April 2007, Ackman had been telling anyone who would listen that the mortgage market was in trouble; in the end, the crisis was good for him. Pershing Square shorted some of the subprime industry's major players—including mortgage guarantors Freddie Mac (FMCC) and Fannie Mae (FNMA) and bond insurers such as MBIA (MBI) and Ambac (ABK)—and made billions of dollars. More recently, Ackman helped rescue General Growth Properties, the nation's second-largest mall owner, from near-collapse. The salvage effort contributed to his flagship fund's net return of 29 percent in 2010. According to Hedge Fund Research, the industry average was 10 percent. "We like to find investments where our interests are aligned with what's good for America," Ackman says.

He has made more good calls than bad, but the bad ones have been memorable. He ended up liquidating Gotham Partners, his first fund, in 2003, because of a bad bet on golf courses. In 2009 he apologized to clients who had money in a Pershing Square fund that suffered a $1.8 billion loss on an investment in Target (TGT), the Minneapolis-based retailer. And he admits that Pershing Square has lost $125 million on its investment in the Ann Arbor (Mich.)-based Borders (BGP) bookstore chain, which is expected to file soon for bankruptcy.

In many ways he is a descendant of Carl Icahn, the corporate raider who became known in the Eighties as a green-mailer, taking stakes in companies and being such a pest that they paid him to go away. Icahn has since transformed himself into a "shareholder activist," but he still has the whiff of a fast-buck artist. Although Ackman's approach is often the same, he has managed to wrap his tactics in a smooth, well-learned politesse. "He comes across as cool and detached," says Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware. "Those fellows from the Eighties were more theatrical."

Ackman grew up in leafy Chappaqua, the wealthy suburb of New York, and has the wonky air of a Silicon Valley or Washington type. He likes to talk about how he immerses himself in documents like Securities and Exchange Commission filings, crafting proposals so substantial that they are embraced by his targets. Indeed, Ackman calls any attempt to compare his investing style with Icahn's "absurd."

The hedge fund manager's boosters say Ackman's intellectual, constructive approach sets him apart from his old-school predecessor. "He doesn't extract value, he adds it," insists Byron Wien, chairman of Blackstone Advisory Services. "Well, he does extract it. But he adds it first."

CEOs and boards of directors, some of whom may not be eager to, say, have their empire divided into thirds, have found that hardball can follow spurned proposals. Target discovered this in 2008 when it rejected Ackman's suggestion to spin off the land beneath its stores as a publicly traded real estate investment trust. The hedge fund manager and four allies tried and failed to win seats on the Target board in a bitter and highly publicized proxy battle.

It may be that no companies really welcome carefully thought-out proposals from New York money managers. Icahn, for one, doesn't think they do. "I really think activism is good for the country," he says. "But it's absurd to believe that entrenched management and boards welcome activists when they first come on the scene. It would be like Julius Caesar thinking that the people in the provinces welcomed him into their cities because they loved him. That's how you lose money."

It's a sunny day in January, and Ackman is sitting in his conference room in Manhattan, the snow-covered park spread out below, wearing the typical financier's blue shirt and red tie. Most financial types make sure they always have a PR guard of some kind around, but no one shadows Ackman, and he answers his own e-mails.

In conversation he possesses the geeky intensity of a high school wunderkind, speaking quickly as if he's trying to squeeze as much information as he can into a limited amount of time. Much of his talk these days revolves around his optimism about the recovery and how it has driven some of his investing. "We have been more bullish than most people on the economy for a while now," says Ackman.

He still sees some obstacles: the national debt, the trade imbalance, unrestrained heath-care costs, state insolvencies, and municipal credit issues. "You know," he jokes, "all the things you read about in [Bloomberg] Businessweek."

Ackman argues that these should not obscure the bright spots. Automobile sales are up. Retail sales are improving. "The world is getting better—especially the U.S.," he says. "That's good for us because we are a very U.S.-centric fund."

He adds: "The only thing that we haven't seen is an uptick in housing prices. But that will come, too."

Ackman recently gave a presentation at an investor conference titled "How to Make a Fortune" about what he sees as the coming resurgence of the housing market. "I thought it would help," the hedge fund manager says. "I thought it might encourage the marginal buyer to buy a home. That's good for the country. Actually, I got a lot of calls from people who are buying homes and starting funds to invest in rental properties as a result."

Ackman may or may not be sparking the rebound of the housing market, but he has few doubts about his thesis: He says it's all about being able to look at the world with complete dispassion. "When you go through something like the financial crisis, it makes a psychological imprint on you," he says. "It becomes hard to interpret information in a way that is positive. I'm emotionally very neutral about economic things. That's why I can look at them objectively."

He has shown such confidence for years. When Ackman was a senior in high school, he made a $2,000 wager with his father, a commercial mortgage broker, that he would get a perfect score on his SATs. He got one question wrong. But he didn't lose any money. He was so sure of himself that his dad withdrew his bet the night before the test.

Ackman went to Harvard, where he surprised his undergraduate friends with his fascination with the financial markets. "He was always interested in business and investing," says Tilson. "I still remember seeing him on Black Monday in 1987. He said, 'Did you see what happened in the market today?' I had no idea."

In 1992, after graduating from Harvard with an MBA, he and David Berkowitz, one of his classmates, founded Gotham Partners. From the beginning, Ackman fancied himself a real estate expert like his dad, and that was where a good deal of the fund's money flowed. However, real estate would also be the downfall of Gotham Partners. The fund bought 26 golf courses with other people's money and tried to sell them to a REIT. One of the trust's investors filed a class action in protest, and a New York judge effectively killed the plan in 2002. Rather than carry on, the partners dissolved the fund.

It was a painful moment for Ackman. A year earlier he had shorted MBIA, a bond insurance company that he thought was taking on too much risk by guaranteeing faddishly exotic flavors of debt such as collateralized debt obligations. He cornered regulators and ratings agency officials at public events and told them MBIA would soon fail. The bond insurer complained to then-New York State Attorney General Eliot Spitzer. Ackman was served with a subpoena from Spitzer's office, which wanted to know if he was spreading misinformation about MBIA to salvage his dying fund. When The New York Times learned of this, it painted Ackman as a sleazy opportunist.

Ackman, however, was excited. He would be able to lay out his case to the authorities. "This is going to be a good thing," he told his friends. "I'm going to meet Eliot Spitzer." He sat though five days of depositions, ignoring his own lawyer at times when the guy tried to shut him up for his own good.

He reentered the hedge fund business by founding Pershing Square in 2003 and taking a new short position against MBIA, purchasing credit default swaps that would rise in price if his predictions came true. The bond insurer continued to depict him as an avaricious short-seller, and Wall Street seemed to agree. MBIA's stock went up, not down. Some of Ackman's own advisers started to worry. "Several of us got queasy and said, 'This has been going on for so long. Nobody accepts our point of view,'" recalls Edward Meyer, the former CEO of Grey Global Group. "Bill would say, 'Right is right. It will work out because I am right.' "

Ackman was vindicated in epic fashion. The Attorney General's office ended up going after MBIA instead of Ackman, and in 2007 the company paid $75 million to settle the Attorney General's charge that it had engaged in questionable accounting practices. As billions of dollars of CDOs metastasized into toxic waste, MBIA's stock was clobbered. Pershing Square ended the year up 22 percent. "For five years he was wrong, wrong, wrong," says Tilson. "Then he made billions."

Ackman was now a hero, the hedge fund manager who tried to alert complacent Wall Street analysts, ratings agencies, and regulators about a dangerous flaw in the mortgage system. "He may be aggressive, he may be over the top, he may not be able to speak in short sentences," Joe Nocera of The New York Times gushed in his column, "but he's doing the hard work, and thinking the hard thoughts, that they refused to do for far too long." (MBIA declined to comment.)

As Ackman was winding down his battle with the bond insurer, he started buying shares of Target. The company couldn't have been more different from MBIA. It was a well-managed retailer, the only discounter that had found an effective strategy for competing with Wal-Mart Stores

(WMT). Ackman, however, had identified a problem: Target owned its own credit-card receivables. He was convinced they would be a liability at a time when people were losing their jobs. Ackman accumulated 9 percent of the company's stock. He was so confident that he parked all his holdings in one fund, juicing them up with borrowed money.

Target ended up selling 47 percent of those receivables to JPMorgan Chase (JPM). "That's something that pleased investors," says Bill Dreher, a retail analyst at Deutsche Bank (DB). "I don't think it would have happened without Ackman's help." Even so, Target's shares fell like every other retailer's, because of the recession. By early 2009, Pershing Square's Target fund had lost 90 percent of its value, and Ackman sent an apology letter to his investors.

Predictably, perhaps, his relationship with Target and its investment banking adviser, Goldman Sachs (GS), became strained. Goldman Sachs rejected his suggestion to put Target's land in a REIT. Target said the proposal was too risky and would dent the company's credit rating. Analysts such as Dreher agreed: "We didn't care much for that plan."

Even Michael Porter, a Harvard Business School professor and one of Ackman's advisers, sympathized with Target's refusal to be pushed around. "Target is a very, very successful company," he says. "It's a very proud company. [Target CEO] Gregg Steinhafel is a terrific leader. … I think they were almost offended by Bill's suggestion that there were things they could do better."

Ackman embarked on a $10 million campaign in 2009 to get himself and four allies elected to Target's board of directors. He went on television and accused the discounter of having corporate governance problems. It didn't matter. He and his candidates were defeated.

What seemed to bother Ackman most was some of the bad press. Nocera, his former cheerleader, compared the hedge fund manager to "a spoiled child unaccustomed to being told, 'no.'" Ackman, in return, stayed up all night and banged out a 5,000-word response. "Mr. Nocera's article is a plagiaristic summary of Target's PR firm's positioning in this proxy contest," he wrote. "The piece has no relationship to the facts and represents the pettiest form of hateful and destructive journalism."

The investors in his Target fund received more gracious treatment. "We basically said, if you lost money in the Target fund, we won't charge you a fee in the main fund until you have made back those losses," Ackman says. "We have paid back a substantial majority of those investors … over the last few years."

By the fall of 2008, he had taken an interest in General Growth Properties (GGP), a company with trophies like Faneuil Hall in Boston and South Street Seaport in New York. It was groaning under the weight of $22 billion in debt that it would have to refinance by the end of 2012. With the debt markets frozen solid, it was unclear how the company would survive.

Investors were fleeing commercial real estate, but Ackman took a different view: "I watched the stock go from $60 to 30 cents. You had to look at something like that. It wasn't an Internet company stock. It's one of the most stable real estate asset classes. It just had a liquidity problem."

He wanted General Growth to file for bankruptcy so it could negotiate extensions with his lenders. The bondholders would surely protest, hoping to seize individual malls and sell them to get their money back. Ackman says he was certain no bankruptcy court judge would allow that to happen. After all, it might further depress commercial real estate prices, causing more banks to fail.

Ackman bought 25 percent of General Growth for $60 million. Then he pushed the company to file for bankruptcy, sending the board a letter listing 10 reasons it should do so. In April 2009 the company filed for Chapter 11 protection. It was the biggest real estate bankruptcy in history.

Ackman also clamored for a board seat and accused his old nemesis, Goldman Sachs, of counseling the other directors to reject him. He found an unlikely ally in John Bucksbaum, then chairman of General Growth, whose father, Matthew, was one of the founders. In better times, Bucksbaum wouldn't have welcomed Ackman into his boardroom: "He had a reputation," Bucksbaum says.

Things were different now. The Bucksbaums held 21 percent of General Growth's stock. Once their slice of the company had been worth $4 billion. Now it was valued at about $20 million. Bucksbaum thought it couldn't hurt to let another big shareholder onto the board, especially one such as Ackman, who would fight to get the stock price up. So in June 2009, Bucksbaum says, he cast the deciding ballot in a 5-4 vote that put Ackman on the board of General Growth Properties.

Everything else seemed to play out as Ackman predicted. General Growth's creditors tried to short-circuit the bankruptcy, but in August 2009, U.S. Bankruptcy Court Judge Allan L. Gropper denied their motion to dismiss the case. The bondholders had little choice but to grant the company a five-year extension. Ackman insists he never doubted the outcome.

In November, General Growth emerged from bankruptcy. In mid-January, its shares were trading at $15. "We turned $60 million into $1.6 billion," Ackman boasts.

He cannot always guess what judges will do. In July 2010, Pershing Square and Winthrop Realty Trust (FUR) paid $45 million for $300 million of junior loans on Stuyvesant Town-Peter Cooper Village, an 11,232-unit apartment complex on the East River in Manhattan whose previous owners, Tishman Speyer and BlackRock, had defaulted on $5.4 billion worth of loans.

Ackman was sure Pershing Square and Winthrop could foreclose on the property and make a $2 billion profit. He just needed a judge to bless the foreclosure.

On the day of the hearing last October, Ackman stood on the Manhattan courthouse steps and told Bloomberg News that he was confident Judge Richard Lowe would come up with the "right answer." "This is a very analogous situation to General Growth," he insisted. He was wrong: The judge ruled that Pershing Square and Winthrop couldn't take over the property without immediately repaying the entire first mortgage. "The judge made the wrong decision," Ackman says.

This is where having a reputation can be useful. The following month, Pershing Square and Winthrop got their entire $45 million back through a settlement with CWCapital, which was servicing the mortgage. CWCapital declined to comment, but clearly it had no desire to tangle with Ackman, who could have appealed the decision and kept Stuyvesant Town tied up in court for who knows how many years. "I figured the nuisance value of our position was worth at least $45 million," the hedge fund manager says with a smile, adding, "Make that the strategic value."

There may be another blowup around the corner, but for now times are good for William Ackman. As he has correctly observed, the economy is on a rebound. But many companies are still feeling sickly—and possibly not in the mood for a public battle with a telegenic activist. Consider what happened when Pershing Square finally went after Fortune Brands.

On Oct. 8, Ackman told the SEC that Pershing Square had bought 16 million shares in Fortune Brands, which made it the conglomerate's largest investor. That put CEO Carbonari, a burly veteran of the home and security division, on the defensive. In November, Carbonari met with his new shareholder at his company's headquarters. Both men say the meeting was cordial and lasted for an hour and a half.

Ackman flew back to New York. Not long after, in early December, Carbonari announced that Fortune Brands would divide itself into three separate companies.

Carbonari insisted that Pershing Square had nothing to do with it. He said the company had been working on the plan for four years. The only praise he had for Ackman's investing acumen was faint indeed. "His timing was very good from the standpoint of coming in, if you will, in the 11th inning," he told Bloomberg Businessweek.

This is not a universally held opinion. "I'm going to give Bill Ackman credit," says Mario Gabelli, chairman of Gamco Investors, a mutual fund headquartered in Rye, N.Y., which owns two million shares of Fortune Brands. "Whether he forced them to do this or they were already planning on doing it doesn't really matter to us. At the end of the day, he was part of the process."

Ackman says he wasn't surprised. "The timing was right, and we make a very creditable case," he says. Fortune Brands' shares are now trading at more then $60. That means Pershing Square's stake is worth almost $320 million more than it was when the hedge fund started buying it.

So it goes. Last October, Ackman also built a position in J.C. Penney (JCP), the midmarket clothing retailer. By January the company had offered Ackman a seat on its board of directors, and he is already up $240 million. Ackman is plainly happy about J.C. Penney's sudden invitation, asking, "Who wouldn't want me on the board?"

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