Hedge fund manager Bill Ackman’s latest move has some praising him as a deal genius and others saying it is an example of everything wrong with corporate America, activist investing, and regulatory law.
Eduardo Munoz / Reuters / Reuters
Bill Ackman, billionaire founder of hedge fund Pershing Square Capital Management, is rewriting the rules of the corporate raider game. And while some are in awe of his bold, barely legal move to team up with the Canadian pharmaceutical conglomerate Valeant Pharmaceuticals to acquire Botox-maker Allergan, others are holding out the deal as an example of everything wrong with corporate America, activist investing, and regulatory law.
The proposed $45 billion deal is unusual because Ackman is basically serving as the shadow buyer of Allergan through Valeant. Put more simply, before Valeant launched its takeover bid for Allergan, the company and Ackman formed a special purpose vehicle, dubbed PS 1, to acquire a stake in Allergan by buying up shares on the open market. Nearly all of the money used to fund the Allergan share purchases came from Ackman, who through PS 1 accumulated a 9.7% stake in the company, effectively giving him a major say in approving or rejecting the deal. And he is obviously in favor of the deal — though Allergan's board thus far has been resistant — since he is in cahoots with Valeant.
The move raises questions about decorum and ethics in activist investing since, though technically legal, it has been widely viewed as extremely aggressive.
"With regard to ethics, what ethics are there?" hedge fund attorney Ron Geffner of Sadis & Goldberg, Geffner asked rhetorically. "Trading is fungible, it's similar to going to war, you either survive or you don't." Geffner added that Ackman's job is to make money for investors and as long as he complied with all laws, which it seems he has, than shareholders should welcome the move.
The fact that the regulations as currently written allow for this kind of shadow maneuvering goes to the very heart of the problem some have with the deal. At issue is the fact that after Pershing built up a 5% stake in Allergan, the threshold for which the law states its position has to be disclosed to the Securities and Exchange Commission, it was able to acquire an additional 4.7% of the company's shares before its position became public. That's because the reporting timeframe for disclosure spans 10 days, thus allowing Ackman to effectively double his stake in Allergan under what he called in a presentation a "rapid accumulation program."
While this is a totally standard part of the activist investor toolkit, no less than Marty Lipton, a partner of the law firm Wachtell, Lipton, Rosen & Katz and one of the most prominent corporate deal lawyers in the world (he invented the 'poison pill' takeover defense), is one of the rule's more vocal critics. Lipton has called the 10-day reporting time an eternity and said the delay in reporting when an investor has crossed the 5% threshold can give activist hedge funds "a springboard to attack the company with a proxy fight or a hostile takeover bid."
At a recent conference, Lipton also expressed his disdain for several activist investors, including Ackman specifically.
"I don't like Bill Ackman," he said.
Another Wachtell Lipton partner, Theodore Mirvis, said the rule "simply makes no sense" and the firm has gone so far as to petition the SEC to shorten it to one day. Such a rule change would make activism much harder because investors would have less time to accumulate the stock that gives them more weight in public debate and in electing new directors.
"The real question is whether the window should be 10 days or if it should be shorter to try to prevent those accumulations," Steven Davidoff, a law professor at Ohio State told BuzzFeed in an interview. "If you make the window tighter, you will discourage activism."
Shannon Stapleton / Reuters / Reuters
Lipton's feelings about Ackman underscore his polarizing personality within the investing community writ large. Famed for his lengthy presentations and poison pen letters to the chief executives and board of companies he is agitating against, Ackman's confidence, good looks, and track record of success are admired by some and envied by others. The latter group seems to delight in his failure, like when he lost some $700 million on an ill-fated overhaul of J.C. Penney. His very public Herbalife short bet managed to entice a litany of rival hedge fund heavies, among them Carl Icahn, Dan Loeb, and George Soros, to line up on the opposite side and take a long position, resulting in massive losses for him. One of the most-watched moments in televised business news history came when Ackman and Icahn got into a verbal brawl on CNBC, with Icahn saying that Ackman was like a "little Jewish boy crying that the world was taking advantage of him."
Yet Ackman has just as many, if not more, successes under his belt, including some big recent wins. His investment in railroad company Canadian Pacific has more than tripled in value after the company brought in a new CEO and board members. (During that activist brawl, to illustrate Ackman's poison pen prowess, he ended a letter to Canadian Pacific's then-chairman with this nugget: "Let's avoid having a border skirmish turn into a nuclear winter. Life is too short.")
More recently, he scored big when bourbon maker Beam was purchased by the Japanese company Suntory for $13.6 billion, likely netting Ackman around $370 million when the deal closes.
And Ackman is nothing if not a persistent investor. Despite the accumulated losses, for instance, he has promised to pursue his Herbalife short "to the end of the earth" and he maintained his short bet on the bond insurer MBIA for seven years. Generally, Pershing tends to hold onto investments for four to six years.
That trait should serve Ackman well since the Allergan deal is expected to be a long, drawn-out battle given its complexity. For starters, the company hasn't accepted the offer. To be sure, it seems downright resistant to it, initiating a shareholder rights plan, or poison pill, that effectively prevents Pershing from accumulating a greater share of the company. When Valeant CEO Michael Pearson was asked during a presentation to discuss the merits of the deal and why he decided to partner with Ackman, he joked, "He's charming."
"Bill is very persistent, we need someone who is going to be persistent, he's going to go the full distance, he's not going to drop out in a month or two," Pearson said, adding that Ackman also brought $4 billion to the table.
Indeed, if the Allergan deal proves anything, it is that Ackman really doesn't care what anyone thinks about him. He only cares, it seems, about making money and the thrill of the deal.
"The Pershing Square–Allergan deal is an innovative development in investor activism and will likely prove as a model for other activists in the future," said Sahm Adrangi, founder of Kerrisdale Capital, a $300 million hedge fund currently embroiled in its own activist fight with Morgans Hotel Group. "Pershing Square has a track record of innovative activism, such as organizing a charity event to present on one of their shorts and now the Allergan deal."
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