'Alpha Wolf' Ackman Rules The Hedge Fund World

Jan 6 2015 | 6:46am ET

Herbalife Gains

“Herbalife was the first time there were people hoping we would fail,” Ackman says. “That was the only time in my career where I actively thought people were trying to harm us.” Of course, he was and is actively trying to harm Herbalife. “We are exposing a fraud,” he says.

Herbalife is under investigation by the U.S. Federal Trade Commission and the SEC. Its share price has dropped almost in half since last summer, to $37.58 as of Jan. 2. Ackman says his position in Herbalife rose $800 million in 2014.

On the morning of April 22, David Pyott, CEO of Allergan, woke up to a shock: Ackman had bought 9.7 percent of his company and was backing a rival’s bid to take it over. Pyott was not the kind of manager activists normally target. He is the force who turned Botox into a $2 billion brand. In 2014, Harvard Business Review ranked him the fourth-best CEO in the world.

Beyond Theatrics

“We said, ‘OK, we need to get ready because we are going to war,’” says one close adviser to Pyott who worked with him on the proxy contest. (Pyott declined to be interviewed for this story.) His team began studying Ackman, learning his tactics.

One past proxy battle that was useful: the 2012 fight for Canadian Pacific Railway Ltd. Here, in a heated contest, Ackman ousted a powerful board. At one point, he sent an e-mail to Chairman John Cleghorn with the subject line “War and Peace.” He said he’d recently “become more interested in military history.”

Beyond theatrics, Ackman gave shareholders a reason to vote his way. He painted the incumbents as clubby, outdated, fumbling. He presented shareholders with another option -- a new, highly compelling CEO, Hunter Harrison, who’d successfully run rival railroad Canadian National Railway Co. for a decade. Since Ackman took his stake in October 2011, the stock has more than tripled, to $188 as of Jan. 2.

Bigger Issues

Pyott’s counteroffensive drew from Ackman’s playbook. His strategy started with attacking Ackman’s investment thesis. His team published research raising questions about Valeant’s business model and its accounting. At one point, the Allergan team leaked an e-mail one of Valeant’s own bankers had sent -— prior to being hired by Valeant -- calling the company “a house of cards.”

Meanwhile, Pyott gave his shareholders an alternative to Valeant. By early fall, he was already in talks with Actavis that would lead to the winning $66 billion bid.

In many ways, what happened at Allergan makes the case for shareholder activism. By putting the company into play, Ackman increased its market value almost immediately and, in the end, made shareholders a lot of money.

Critics, however, say there are bigger issues. “We need strong companies to compete in the global economy. Are we better off if companies like Allergan disappear?” asks Bill George, a professor at Harvard Business School and former CEO of Medtronic Inc. The danger, he says, is that well-run companies will be forced to re-deploy resources, change strategy and cut long-term investments to boost earnings and placate activists. “It’s not good for America; it’s not good for society,” George says.

Who’s Next?

Activist hedge funds now manage $91 billion, up from $59 billion at the end of 2012, according to research firm eVestment. That money means activists can go after bigger, stronger targets and, increasingly, that’s what they are doing. Take Loeb’s pursuit of Amgen Inc., Icahn’s of Apple Inc., Nelson Peltz’s of Pepsico Inc. At this point, just about every board member and CEO has to be wondering, who’s next? On Dec. 17, Ackman told Bloomberg TV that McDonald’s Corp. could be better run. Immediately, the stock popped 3 percent.

“Excuse me, Mr. Ackman? Can I have your autograph?” It’s a rainy afternoon in early December, just outside Pershing Square’s offices. William Holmes, a recent college graduate with a degree in economics, is shivering in the cold, holding a notebook. “I’ve studied everything you’ve done,” the young man gushes. “You are like the Socrates of our time.” Ackman writes the kid a note. “I’m telling you, I have a huge fan base,” he says as the beaming young man walks off. Then he turns to head back up to work.

- With assistance from Michael Weiss in Princeton.

Copyright 2014 Bloomberg. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

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