CNBC Squawk Box Interview – September 2015
- You see Board rejecting transactions where shareholders are supportive, acquirer is willing to pay a big premium, and in fact, many of them are stock deals where shareholders get to continue in value creation
- With Allergan, we called the question and allowed the shareholders to decide what they wanted to do with the future of the business
- We own concentrated positions in companies and we own them for years (CP, Howard Hughes, etc)
- Value of business is present value of future cash business will generate over its life. CP’s stock price moves up and down with oil and commodity prices. Price of oil in the short-term doesn’t have a particularly meaningful impact on that calculation but it seems to have a big impact on stock price. Volatility is an opportunity for a long-term investor to buy more at an attractive price
- When you are moving around $20 billion, it’s hard to constantly buying and selling things. You are much better off buying super-high quality businesses and making them better
- Some say short sellers that publicly express views is hedge funds effectively becoming a private regulator. I think that is absurd
- Lumber Liquidators: Whitney Tilson went public a year ago and market ignored him. It took a 60 Minutes coverage to alert the market and stock price went from over $100 to $15 a share; company has been forced to withdraw this product; bunch of investigations by regulators; this benefitted consumers
- Lehman Brothers: David Einhorn said Lehman was undercapitalized and it needs to recapitalize. Lehman ignored him, kept buying back shares, and called him a market manipulator; Had Lehman recapitalized, they may have survived through the crisis and shareholders may not have had to lose all of their investments in Lehman
- Activism is inherently a healthy phenomena
- We gave Herbalife public, transparent presentations with a website containing our research and source documents; this is incredibly healthy for market transparency
Full paraphrased transcript below:
Bill Ackman: Every day you read about deals which don’t happen. You look at transactions where shareholders are supportive, acquirer is prepared to pay a big premium, in fact many of these deals are stock deals where the shareholders get to continue in the value creation – and the board rejects it and they don’t happen. The acquiring company walks away having spent $100, 200 million, when you consider the financing commitments and everything they need to get. What we did in Allergan is we called the question and allowed the shareholders to decide what they wanted to do with the future of the business. There are companies we’d like to buy. There are transactions that don’t happen for social issues that I think we can help catalyze. I think it is very likely we will partner with another strategic to make a bid for business. We may not get it but the outcome for shareholders is business either improves on its own or it gets sold to someone else. I think that’s a win.
Host: Those were great returns. This summer has not been great for you nor has it been for most of hedge fund industry. And last year, you had huge returns. What does the end of the year look like for you and what do you think it will look like for people in your business. If it turned out to be negative, what do you think it does to the business?
Bill Ackman: I think people call us a hedge fund and they call the whole category. I think we need to do few things. From an industry perspective, we need to explain a little bit better about what a hedge fund is. There are some funds that are designed to not lose money almost in any market conditions – call it market neutral. I think there are very few that actually work but there are some that are successful in that model. Down 7% month for a market neutral fund is like a disaster. We are really principally a long-only fund with the exception of Herbalife. We own concentrated positions in companies and we own them for years. CP we’ve owned for four years and we’ll probably own it for many more years. Howard Hughes we’ve effectively owned for seven years. I can’t tell you where any of our stocks are going to be next month and certainly not at the end of the year. What I can tell you is that businesses we own like Mondelez will be a much more valuable company a year from now than it is today. Two years from now it’s going to be even more valuable. What’s interesting about a company like CP, stock price moves up and down based on oil prices and commodity prices. What is the value of the business? It is the present value of the cash that business generates over its life. Price of oil in the short-term doesn’t have a particularly meaningful impact on that calculation but it seems to have a big impact on stock price. Volatility is an opportunity for a long-term investor to buy more at an attractive price. In the case of CP, they are buying more of the company.
Host: Bill, I almost feel like you are a split personality. On the one hand you are a long-term investor. On the other hand, you are a big activist. What do you think of yourself as?
Bill Ackman: I think activists are long-term investors. Not all of them. Again I think there is a spectrum, it’s just like hedge fund managers, mutual fund managers. 10 years ago, people accused of us being short-term. We had only been in business for a year, it’s hard to prove that we are a long-term investor. When you are moving around $20 billion, it’s hard to constantly buying and selling things. You are much better off buying super-high quality businesses and making them better.
Host: Herbalife article
Bill Ackman: The most important thing about this article is that it basically says short-sellers who share their views publicly, there is something very wrong with that. It’s effectively as you say, hedge fund becoming a private regulator. I think that’s absurd. Look at Lumber Liquidators and I will take myself out of it. Whitney Tilson goes public a year ago and says this company is shipping formaldehyde product that could cause cancer and harm – ignored by the markets. It took a 60 Minutes piece which Whitney obviously was the protagonist in but they did their own research as well. Ultimately alerted the world – stock went from over $100 a share to today it’s $15; the company has been forced to withdraw this product; they are under investigation by whole bunch of regulators. I think consumers have benefitted, the shareholders that sold when Whitney went out with his piece have been big beneficiaries. Look at David Einhorn and Lehman – came public and said this company is undercapitalized, the company needs to recapitalize. Lehman ignored him, continued to buy back stock. They said David was a market manipulator. Had the company recapitalized, Lehman might have made it through the financial crisis, shareholders might have gotten something out of their investment in Lehman. Look at Jim Chanos and Enron. What’s interesting about the article – I mean, there are lots of factual problems with the article which we can address. This is an inherently healthy phenomenon. What’s interesting about the article is the last sentence he talks about – hedge fund managers operating behind closed doors and private meetings… There is nothing closed door or private about our investment in Herbalife. We gave them most public, most transparent presentation, 350 slides multiple presentations with a website with every piece of research we’ve done plus all the source documents. Isn’t that an incredibly healthy thing for market transparency? Reporters can write whatever they want to write. I respect that. For someone who spent an enormous time – 12,000 word article – to come to an absurd conclusion is a disappointment.
I will give you a little fun fact which might help people discern this company is operating fraudulently. Among the facts that he reports in the story, Herbalife is running 101 orphanages in 51 countries over the world. The only place for him to get that fact was Herbalife. Herbalife has something called Casa Herbalife and it’s sort of their philanthropy. What it is they give a blender or two to a children’s organization in a country – and this product that distributors can’t sell, they check a box and Herbalife “donates” to these 101 little places around the world and it’s fed to small children. Now, I don’t know whether small children out there should be drinking this protein shake from Herbalife – that’s a medical question. But the notion that they are running orphanages – I just think that if I were a reporter, I would focus on that. I would go into these Casa Herbalife’s and I wouldn’t ask for Herbalife where the model ones are located but I’d go see that one. I think it’s more a tax fraud for distributors than it is helping.
Bill Ackman is the founder and CEO of Pershing Square Capital Management, an activist hedge fund with an AUM of roughly $12 billion as of early 2016.