'Alpha Wolf' Ackman Rules The Hedge Fund World

Jan 6 2015 | 6:46am ET

By Katrina Brooker (Bloomberg) -- Lunch was a bit awkward. It was around 1 p.m. on a warm October day in New York. A group of Wall Street investors were tucking into chicken in a red-wine demi-glace and Brussels sprouts at the Plaza Hotel. They’d convened for Jim Grant’s fall conference, hosted by the influential editor of Grant’s Interest Rate Observer.

The lunch speaker was Marty Lipton, legendary lawyer and veteran defender of management in countless proxy battles, hostile takeovers and corporate raids. His talk, which he had titled “Activist Interventions and the Destruction of Long-Term Value,” took aim at a strategy being used with increasing success against his clients and other corporations.

“It begins when an alpha wolf spots his prey and decides to move in for the kill,” Lipton said. He never addressed anyone directly, but it was clear his words had a target. William Ackman, billionaire founder of Pershing Square Capital Management, sat a few feet in front of the speaker, listening quietly, Bloomberg Markets will report in its February issue.

Ackman, 48, is one of the most famous hedge-fund activists in the world. Just about everyone in the room knew about the tensions between the two men. Earlier in the year, Ackman had teamed up with one drug company, Valeant Pharmaceuticals International Inc., to take over another, Allergan Inc. -- a client of Lipton’s firm, Wachtell, Lipton, Rosen & Katz. Both sides had sued; each was accusing the other of misconduct. In September, Ackman had written a letter to the Allergan board, saying the board’s refusal to engage with him would ultimately prove an embarrassment to the directors. “The smell of strong brew is in the air,” Ackman wrote. “Now is the time to wake up.”

‘Scorched-Earth Activism’

It was hard not to watch Ackman as Lipton spoke. “Scheming with a hostile acquirer” and “publishing nasty, vitriolic letters,” Lipton said, ticking off examples of what he called “scorched-earth activism.”

If Ackman knew any of the barbs were meant for him, he didn’t let on. His expression was inscrutable. When Lipton finished, the room got quiet. Grant, the host of the day, stood up, gestured toward Ackman and said, “The alpha wolf ….”

Right now, Ackman is on top of the hedge-fund world. Thanks in part to his move on Allergan, the maker of Botox, Pershing Square International posted a return of 32.8 percent for the first 10 months of 2014, making it the No. 1 fund in Bloomberg Markets’ annual ranking of the best-performing large hedge funds.

And that was before the Allergan battle came to a head in November. By year’s end, Pershing Square International had gained another 10 percentage points. (In addition to the International fund, Pershing Square has three other funds; all four funds hold the same positions.)

Public Ridicule

A year ago, the outlook was different. Heading into 2014, Ackman seemed to be in trouble. His long position in JC Penney Co. and short position in Herbalife Ltd. had both gone disastrously wrong, losing hundreds of millions of dollars and making him the target of public ridicule. At JC Penney, his handpicked CEO had failed. Herbalife was an even bigger debacle: Other big hedge-fund managers openly derided his $1 billion bet against the nutritional supplement company and his insistence that it was a pyramid scheme. Carl Icahn, the activist who’s been at this the longest, called Ackman “a liar” and “crybaby” on television.

Allergan put those troubles in the past. In April, Ackman stunned Wall Street with news that he had acquired almost 10 percent of Allergan’s stock and was backing Valeant in a $46 billion bid to take over the company. Almost immediately, Allergan’s stock began climbing. Ackman’s stake rose by close to $1 billion within weeks of the announcement. The bid launched a fierce hostile campaign for shareholder votes.

More Dangerous

Those votes will never be tallied. In November, Allergan escaped Valeant and Pershing Square by signing a merger agreement with rival drug company Actavis Plc. The deal was valued at $66 billion. In seven months’ time, Pershing Square’s Allergan stake had risen in value by more than $2 billion, to $5.7 billion. “Bill Ackman Just Perfectly Executed The ‘Heads I Win, Tails You Lose’ Trick That Makes Wall Street Famous,” a Business Insider headline declared.

Now, Ackman has more than $18 billion to work with, up from $11.5 billion as 2014 began. From the point of view of a potential target, he’s become 50 percent more dangerous. “I don’t think there is a CEO or board right now not thinking about how to plan for the possibility of an activist coming in,” says Dean Scarborough, chief executive officer of office products company Avery Dennison Corp. (Scarborough has an expert close at hand: David Pyott, the CEO of Allergan, is a company director.) In November, when Ackman announced he’d acquired an 8.5 percent stake in Zoetis Inc., a maker of animal health products, the company immediately adopted a poison pill plan to gird itself for a hostile takeover.

‘Beneath Me’

The question -- for businesses, markets, the economy -- is, is Ackman a threat or a sentinel?

Ackman wants to talk about that. “I’m challenging Marty Lipton to a debate,” he says in an interview about a week after Lipton’s talk. “Anywhere. For any length of time. Activism: It’s good for America; it’s great for the economy. We should put it on Bloomberg TV. I tell you, people would show up for this.”

People might, but Lipton wouldn’t. “There is no way on earth I would debate Mr. Ackman,” he says. “You know how I feel about him. It would be beneath me.”

One Saturday afternoon in November, Ackman is walking down Amsterdam Avenue on New York’s Upper West Side. “A lot of people viewed 2013 as the end of Pershing Square,” he says. “That was kind of the perception in the media: JC Penney, Herbalife, Icahn going on TV saying I’m an idiot.”

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