Hedge fund billionaire Bill Ackman is not known around Wall Street for his humility. But after riding Valeant Pharmaceutical’s stock down from a peak of $US279 in 2015, to around $US11 this month, he has something to say to his investors.
“Clearly, our investment in Valeant was a huge mistake,” he wrote in Pershing Square’s 2016 annual letter.
“The highly acquisitive nature of Valeant’s business required flawless capital allocation and operational execution, and therefore, a larger than normal degree of reliance on management. In retrospect, we misjudged the prior management team and this contributed to our loss. We deeply regret this mistake, which has cost all of us a tremendous amount, and which has damaged the record of success of our firm. “
You’ll recall that Valeant crashed in October of 2015 under the weight of scrutiny over its pricing practices and accusations of malfeasance from a short seller. That month, management also revealed that it was hiding a secret mail-order pharmacy within the company called Philidor — a pharmacy that is now being investigated for fraud.
You may also recall that, as early as 2014, investor Jim Chanos, the founder of hedge fund Kynikos Associates, was calling Valeant a rollup. That is to say, it was a company that needed a steady stream of acquisitions to show growth and survive.
Ackman denied that Valeant was a rollup throughout his years-long relationship with the company. But he sort of admits that he was wrong about that in his annual letter.
He says one of his mistakes was failing to understand how hard it is to keep a rollup going, essentially:
Management’s historic ability to deploy capital in acquisitions and earn high rates of return is not a sufficiently durable asset that one can assign material value to in assessing the intrinsic value of a business.
Ackman also said that he clearly made Valeant far too large a position in his portfolio, that any management team can make mistakes, and that a “large stock price decline can destroy substantial amounts of intrinsic value due to its effects on morale.”
None of this acknowledges that he entered his relationship with the company by doing an incredibly risky deal that is now being evaluated by a California court. Ackman’s first interactions with Valeant were in a joint attempt to buy Allergan, another pharmaceutical company. Ackman purchased Allergan shares in order to push the company to accept a merger with Valeant.
When that offer turned hostile and Allergan was ultimately sold to a white knight, Ackman made money anyway and even paid some of that to Valeant.
Now, the $US2.6 billion Ackman and Valeant made from that deal is at risk because Allergan shareholders are suing them for insider trading. Legal or not, it was a deal that raised eyebrows the moment it was announced. It always seemed really close to the line.
Getting too creative — maybe that should be on the list of regrets.
That said, an apology is still huge for Ackman. Last year, as Valeant was crashing hard, he wrote in his annual letter that he continued “to believe that the value of the underlying business franchises that comprise Valeant are worth multiples of the current market price.”
He even blamed traders who followed him in and out of his trades for adding more volatility to the stock.
This year’s letter…this is growth.
“My approach to mistakes is that I personally assume 100% of the responsibility on behalf of the firm while sharing the credit for our successes. While I and the rest of the Pershing Square team have suffered significant losses from this failed investment as we are collectively the largest investors in the funds, it is much more painful to lose our shareholders’ money, and for this I deeply and profoundly apologise.”
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