One Hedge Fund Billionaire’s Wall Street Alamo

Is it possible for a billionaire hedge fund manager to blow it all?  Yes and Bill Ackman, founder of the hedge fund Pershing Square Capital Management, is showing us how.  His questionable investment in Valeant and fight to bankrupt the health food company Herbalife for profit might prove to be his Alamo.

The famed 13-day fight at the Alamo in Texas during the Texas Revolution did not end well for the Texans. The Mexican fighters showed no remorse and no mercy.  They were brutal, much like the Wall Street sharks ready to take out Ackman.  That battle only lasted a few weeks in 1836, but Ackman’s defense of Pershing Square has been going on for years, but it may suffer the same fate.

In both the Valeant and Herbalife cases, Ackman tried to use the power of government to make big bucks.  With Valeant, Ackman was banking on insurance companies and government to pay high prices for life saving drugs.  With Herbalife, Ackman pressured the government to investigate the company as a way to drive it into oblivion.  In both cases, Ackman’s battle plan was an epic failure.

William D. Cohan of Vanity Fair published a piece titled “Is Bill Ackman Toast?” on October 17, 2016 that documented massive losses on the part of Pershing Square:

Pershing Square, which had nearly $20 billion under management in March 2015, is down to around $11.4 billion after 18 months of massive losses in its concentrated portfolio of 11 companies, and in particular at Valeant Pharmaceuticals, where Ackman is the largest shareholder. This summer, Fortune reported that investors withdrew $600 million from Pershing Square during the first six months of the year. A source close to Ackman told me that $1 billion had been redeemed over the first nine months of 2016. It’s possible that investors would have pulled more but for the complex rules that Ackman has imposed limiting withdrawals.

Ackman’s Waterloo, or Alamo, was a really risky investment in Valeant that started well, then collapsed:

Ackman’s Waterloo may be the seemingly impulsive $3.2 billion bet he made nearly two years ago on Valeant, a controversial Canadian-based drug manufacturer that specialized in hoovering up other drug manufacturers, such as Bausch & Lomb and Salix Pharmaceuticals, and then astronomically raising the prices of some of their lifesaving drugs.

The company made billions for investors. But like a drunken gambler refusing to walk away from the Black Jack table, Ackman was not satisfied with his billions in gains.  He poured even more money into the company in a greedy effort to make even more cash off the drug manufacturer and in doing so, engaged in activities that raised some eyebrows.

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Stock price soared until a story broke that crushed the company with allegations of fraud:

His luck began to change on October 19, 2015, when Roddy Boyd, a journalist at the Southern Investigative Reporting Foundation (disclosure: I am on the foundation’s board), broke the story of Valeant’s hidden ownership of Philidor Rx Services, a specialty pharmacy company that had been the undisclosed engine behind much of Valeant’s revenue growth. “The value of Philidor was that it not only got insurers to approve a large volume of drug prescriptions—occasionally using illegal means like submitting fake [tracking] numbers—but did so at heroically inflated prices that were often hundreds or thousands of times above the price of therapeutically equivalent generic, or even rival name-brand drugs,” Boyd e-mailed me.

That was a huge blow to Pershing Square and the experience left investors running for the exits.

Ackman’s fight to bankrupt Herbalife to make good on a billion-dollar bet is also becoming a money pit for Pershing Square’s investors.

Roger Parloff wrote in Fortune, “The Siege of Herbalife,” on September 9, 2015 that Ackman thought it would be easy to take down the company.  He hired PR firms and lobbyists to generate a government investigation based on false premises into the business practices of the company in order to make good on his bet that failed.  Ackman also ignored the fact that good faith investors would not be scared of his attack and would try to make some money off of company growth.

In the siege of Herbalife, Ackman clearly did not anticipate the company’s staying power or the fact that a number of hedge funds would take the opposite side of his bet. The battle has taken a toll.

Valeant and Herbalife have become losing battles for Ackman.  Call his failing fight his Waterloo – his Alamo — but no matter what you call it, Ackman made a big mistake in his reckless investment in Valeant and his bet on the death of Herbalife.  Congress should take note and stay far away from bad faith hedge fund managers like Bill Ackman.

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