Bill Ackman’s Admirable AnticsWilliam D. Cohan
Aug. 29 (Bloomberg) -- The word on Wall Street is that Bill Ackman, the billionaire hedge-fund manager, has jumped the shark. Between a $500 million loss on an almost $1 billion investment in J.C. Penney Co., and more than $300 million in losses on a billion-dollar-plus short position in Herbalife Ltd., Ackman has wigged out, the whisperers say.
His hedge-fund brethren are all too eager to proclaim Ackman and Pershing Square Capital Management LP, the hedge fund he runs, a finished piece of business, torn asunder by his unique brand of arrogance, hubris and bull-headedness.
They are lining up to bet against him. In Herbalife, the multilevel marketing company, Ackman is facing off against such investor titans as Carl Icahn and George Soros (and previously, Dan Loeb, who made his money there and moved on). Now that Ackman has sold out of J.C. Penney, a number of other hedge funds, reportedly including Soros, have taken big positions in the stock, seeing profit potential where Ackman saw none.
I, for one, don’t buy the idea that Ackman is washed up. I even find his outspokenness refreshing. Yes, the 47-year-old Ackman is supremely confident -- often to a fault -- and yes, between J.C. Penney and Herbalife he has cost his investors (and himself) almost $800 million this year.
Yet Ackman’s critics rarely point out that Pershing Square’s net returns so far this year (after subtracting fees) are positive, according to his Aug. 20 investment letter. They range from 5.3 percent to 6.3 percent for the first six months of the year, depending on the fund.
The performance is thanks to his highly successful foray into Canadian Pacific Railway Ltd., where he has almost tripled his investment in the last two years. It’s also because of his holdings in General Growth Properties Inc., a real estate investment trust, which he bought in November 2008 at 35 cents a share and now trades at about $33 -- a gain of almost 100 times his initial investment.
His more recent big investments, in the Procter & Gamble Co. and Air Products & Chemicals Inc., are up 28.3 percent and 7.1 percent, respectively.
Although it is true that U.S. stock indexes are up between 13.4 percent and 15.2 percent this year -- far better than Ackman’s 2013 results -- his returns since the 2004 inception of Pershing Square LP fund (net of the “2 and 20” fees, which means clients pay Ackman something like a 2 percent annual fee on their invested capital plus 20 percent of the profits) handily beats the best-performing stock index by more than five times. His second fund, Pershing Square II, begun in 2005, has returned more than three times the best stock index over the same period. That kind of performance is worth paying for.
Ackman is uncharacteristically contrite about his J.C. Penney blunder. “We are going to make mistakes,” he wrote to his investors. “Because we manage a large pool of capital and we make active investments in large capitalization, high-profile companies, our mistakes are often going to be much more visible than those of other investment professionals.” He added for good measure: “Activist investing requires a thick and calloused skin.”
His critics seem particularly exercised about his public denunciation of J.C. Penney’s interim chief executive officer, Mike Ullman, who was brought back to run the company after the highly embarrassing tenure and departure of Ron Johnson. Ackman had recruited Johnson from Apple Inc., where he successfully ran the company’s upscale stores.
No less than Howard Schultz, the founder and CEO of Starbucks Corp., blasted Ackman for going after his friend Ullman, calling it a “despicable act” on CNBC. Schultz also reminded people that Ackman had backed Johnson’s failed strategy, which “fractured the company and ruined the lives of thousands of J.C. Penney employees and fractured shareholder value.”
Appearing on “Charlie Rose” on Aug. 13, Ackman defended his decision to go public. He pointed out that, before Schultz’s 2008 return as Starbucks’ CEO, Schultz had written a now infamous memo harshly criticizing then-CEO Jim Donald. Ackman said, essentially, that he took a page from Schultz’s book. “What we do is use the public spotlight to ultimately put pressure on companies to do the right thing,” he told Rose. “In the boardroom, I’m active. Outside the boardroom, I’m very quiet about what happens in companies.”
He went on to say that “J.C. Penney over the last few months made a number of decisions or didn’t make certain decisions that we thought were important and critical. I worked within the confines of the boardroom to try to address those concerns about the change in leadership. And when it was unsuccessful I felt the right thing to do was to air my thoughts publicly, not by leaking a letter to the press but writing an open letter to the board.”
In that decision, Ackman was also taking a page from his hero, Warren Buffett. In a 1993 letter to his shareholders, Buffett wrote that, as a director, he prefers to settle differences behind closed doors. If that proves impossible, then a dissenting director “should then feel free to make his views known to the absentee owners” -- otherwise known as shareholders. Buffett continued: “Directors seldom do that, of course. The temperament of many directors would in fact be incompatible with critical behavior of that sort. But I see nothing improper in such actions, assuming the issues are serious.”
As the largest shareholder in J.C. Penney -- with about a 17 percent stake -- Ackman thought Ullman was heading in the wrong direction and, having lost the support of his fellow directors, he also thought the “absentee owners” deserved to know his views. He then resigned from the board and sold his shares at a loss.
Frankly, that kind of public conviction is exceedingly rare these days, and it’s no wonder that establishment types, like Schultz, rose up against Ackman. I find it admirable and refreshing. And I hope Ackman keeps speaking his mind, despite the fire hose of criticism he has attracted.
(William D. Cohan, the author of “Money and Power: How Goldman Sachs Came to Rule the World,” is a Bloomberg View columnist. He was formerly an investment banker at Lazard Freres & Co., Merrill Lynch and JPMorgan Chase.)
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