Baby Buffett: Bill Ackman and Pershing Square

Out of all the hedge funds out there, Bill Ackman’s fund is perhaps one of the most interesting. His company, Pershing Square Holdings, is one of the more activist funds. It actively intervenes in the management of the companies it has a stake in. Ackman tends to build up very large stakes in specific companies, and then very publicly advertise his investment thesis. That way, he creates traction to allow the changes he wants to happen, come true.

Activist investing
In 2014, for instance, Ackman built a significant position in Burger King, just before the company merged with the donut and coffee chain Tim Hortons. Additionally, Burger King moved their corporate HQ to Canada, leading to a good profit for Ackman. He also made about $239m in one day recently thanks to his significant share in Chipotle Mexican Grill. Ackman had, until around the end of 2014, actually made a total profit of 1,199% since 2004, compared to 119% for the S&P 500.

Overzealousness
However, Ackman also has a tendency to get overzealous in his investments. In 2015, Pershing Square built up a huge position in the pharmaceutical company Valeant, convinced it was a very profitable, but legitimate, drug maker. As it turned out, Valeant was using blatantly illegal sales tactics, driving up prices through shell-pharmacies. Instead of abandoning Valeant as the news came out, Ackman only increased his position. This, in combination with the fact that Valeant exploited their market power to drastically increase drug prices, caused a lot of bad press for Pershing Square. Eventually, Valeant’s shares dropped by 90% and Ackman sold his stake, causing a giant loss for Pershing Square.

But Ackman’s woes do not end there. He has also been shorting the dietary supplement company Herbalife with over a billion dollars. Herbalife provides its products through a multi-level marketing scheme which financially rewards people who recruit more distributors. This, according to Ackman, essentially comes down to a pyramid scheme. The Federal Trade Commission had actually investigated Herbalife based on Ackman’s claims, but this only ended in a fine. To make matters worse, another legendary investor also got involved on Herbalife’s side. Carl Icahn decided to take a massive stake in the company, mostly to squeeze out Ackman. This year, Ackman finally got out of Herbalife after five long years, accepting his loss and moving on.

New target?
Recently, Pershing Square has been building up its share in another company, United Technologies. United Technologies is, amongst other things, an aircraft part manufacturer, but it really is more of an industrial conglomerate. Bill Ackman has been pushing for a break-up in order to increase shareholder value, and has slowly been building up a stake in the company.

Other large conglomerates such as Procter & Gamble, Nestlé and GE have all been targets for break-ups, and the same goes for United Technologies. Since UT is a US defense company, it will probably benefit from both the tax cuts and the predicted increased defence budget under Trump. Thus, United Technologies could be a very interesting investment for Bill Ackman.

All-in-all, it’s hopeful that the worst part for Pershing Square is over. It has had an excellent track record up until 2015, which will hopefully be continued from now in into the future.

 

Written by Xander Gelink