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Bill Ackman Copyright Matthew Eisman, Getty Images
Bill Ackman

How to Lose $4 Billion: Bill Ackman's Long Ride Down on Valeant

Ultimately Ackman acknowledged to the world that the headache of Valeant wasn’t worth it any more.

By Beth Jinks, Manuel Baigorri, Katherine Burton and Katia Porzecanski

(Bloomberg) --Bill Ackman was used to the question: how could he stick with a loser like Valeant?

But here it was again, this time over lunch with investors and bankers in London on Feb. 28. And there was Ackman, defending a signature investment that, on paper, had cost his clients billions. Yes, Valeant’s share price had cratered. But he insisted to attendees that the drug company’s turnaround prospects were bright, according to people with knowledge of the meeting.

So much for that. Ackman had spent the better half of two years trying to convince just about anyone he was right about Valeant. On Monday evening, just two weeks after that bullish lunch arranged by investment bank Jefferies Group, he conceded what most on Wall Street already believed: In fact, he’d been spectacularly wrong.

News that his Pershing Square Capital Management fund had sold its entire stake at a monumental loss was greeted with equal parts shock and relish. Plenty of investors got burned by Valeant Pharmaceuticals International Inc., which once seemed as if it could revolutionize the drug industry. But no one lost bigger than billionaire investor Ackman, who bought high and sold low, leaping to the company’s defense time and again in a futile attempt to persuade the world his bet would pay off. He held on, even as redemptions at his firm mounted into the hundreds of millions in the final months of last year.

Investor Withdrawals

In finally selling, the firm lost more than $4 billion, according to Bloomberg calculations based on public filings. Jefferies offered Pershing’s entire holding to the market, pricing the shares at just $11.10 a piece, according to a person with knowledge of the matter, who asked not to be identified because the details aren’t public.

Ackman must now contain the damage. With investor withdrawals piling up, Ackman was presented with a stark choice: hold on to Valeant, or surrender to refocus on other, potentially lucrative investments.

Ultimately Ackman acknowledged to the world that the headache of Valeant wasn’t worth it any more. Pershing Square said in a statement on the exit Monday that the diminished-value holding was sucking up too much time and resources.

Now the hedge fund will also have to try and stem withdrawals. It saw about $600 million in redemptions in the final three months of last year, according to data compiled by Bloomberg. In all of 2016, withdrawals totaled more than $1 billion. Those figures don’t include redemptions that have been requested but are still pending, as it generally takes investors two-to-three years to redeem from the funds. 

Passionate, Dispassionate

To some, the Valeant saga -- and Ackman’s journey in it -- is an example of one of the most challenging parts of investing.

“To be a great investor you have to strike a balance between being passionate and being dispassionate at the same time,” Jonathan Grabel, chief investment officer for the Public Employees Retirement Association of New Mexico, said by phone. “It’s a difficult thing to strike that balance.”

The New Mexico pension was among those that redeemed last year from Pershing Square, due in part to the hedge fund’s long lock-up period -- which would’ve kept New Mexico committed for another two years, he said.

Pershing Square initially bought Valeant shares in February and March 2015 at an average price of $196.72, according to filings. Within months of Pershing Square’s investment, Valeant was embroiled in controversies that caused a collapse in the shares. Ackman and colleague Stephen Fraidin joined the board a year ago, vowing a turnaround to salvage their investment. Top management was replaced, debts were renegotiated, and about $8 billion in non-core assets were put up for sale.

As the stock declined, the hedge fund continued to double down. But instead of buying shares outright, Pershing Square began relying on a combination of put and call options that increased its exposure while minimizing additional capital outlays.

Target, Herbalife

By Monday, Valeant was at about $11 a share, and Pershing’s losses from its stock and options contracts exceeded $4 billion, filings show. Ackman discussed his actions with Valeant’s management beforehand, a spokesman for the drug company said in an email Tuesday.

Having to acknowledge a big bet gone bad isn’t unknown territory for Ackman. The Valeant exit follows earlier high-profile losses in retailers J.C. Penney Co. and Target Corp. He has also amassed losses in an ongoing short battle over nutrition products group Herbalife Ltd. Pershing Square, which usually holds about 10 positions, has made billions investing in big winners such as General Growth Properties Inc. and Restaurant Brands International Inc. It recently -- and profitably -- exited investments in railroad holding Canadian Pacific Railway Ltd. and animal-health company Zoetis Inc. The hedge fund has two new as-yet unidentified holdings.

Mark Baak, director at Privium Fund Management, which has an investment in Pershing’s listed fund, said that it was worthwhile to exit because Valeant “probably dominated all the conversations” with clients.

“It’s a better use of his time just to drop it,” Baak said.

Valeant may go down in history as a stock that tarnished the reputation of a number of prominent investors. In addition to Ackman, hedge fund manager John Paulson and managers of the Sequoia Fund, a storied mutual fund started by a friend of Warren Buffett’s, saw billions of gains evaporate in 2015 and 2016 on a business they believed had found a new model for a drug company. Activist ValueAct Capital Management remains one of Valeant’s biggest holders after first investing in mid-2006 in what was then a small experimental-drug developer.

Short Seller

Many investors were seduced by former Chief Executive Officer Michael Pearson’s notion that he could buy drug companies, slash their research and development budgets, and keep getting bigger through acquisitions. It worked wonderfully, until it didn’t.

Some top investors saw it coming -- and warned him. While Ackman was researching a potential transaction in the drug company, he asked Jim Chanos -- the short-seller who predicted the fall of Enron Inc. and had also bet against Valeant -- for his thoughts on the company, and in return received a 26-page analysis. Ackman later denounced Chanos’s short thesis on CNBC.

Pershing Square had embroiled itself in Valeant a year before it invested, teaming up with the drugmaker in a hostile bid for Allergan Plc. That effort failed, triggering lawsuits -- and Ackman’s appetite for Valeant’s prospects.

At one point, Valeant was described as “ a house of cards” by one of its own bankers, prior to being hired, in an email that was leaked by Allergan during that corporate clash.

Ackman is an investor of extremes, said John Hempton, chief investment officer of Bronte Capital Management, who started wagering against Valeant before it peaked.

“When he’s good, he’s really, really, really good,” said Hempton. “And when he’s bad he’s really, really, really bad.”
--With assistance from Miles Weiss, Charles Stein, Simone Foxman, Cynthia Koons and Nishant Kumar.To contact the reporters on this story: Beth Jinks in San Francisco at [email protected] ;Manuel Baigorri in London at [email protected] ;Katherine Burton in New York at [email protected] ;Katia Porzecanski in New York at [email protected] To contact the editors responsible for this story: Margaret Collins at [email protected] ;Elizabeth Fournier at [email protected] David Gillen, David Scheer

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