Leave it to hedge fund manager Bill Ackman to turn one of his biggest investor-activism setbacks into one of his most bullish bets.
Other than shorting Herbalife, the founder of Pershing Square Capital’s most high-profile play recently was his campaign last year to help drug maker Valeant (VRX) acquire Botox maker Allergan. That all fell apart when Allergan, after months of fending off Valeant’s unsolicited offer, was sold to Actavis late last year.
During the hostile-takeover showdown, Ackman’s fund, in merger arbitrage fashion, had gone very long Allergan—a move that panned out to be very profitable for Pershing as Allergan shares rose on the takeover bids, even though the deal with Valeant failed.
But as soon as the situation changed, Ackman saw an opportunity to also play the other side of the coin. “We spent a year working with Valeant trying to take over Allergan, and one of the frustrations we had, as we got to see Valeant trading at $110 a share, was that we couldn’t buy the stock,” Ackman said during his closing presentation at the 20th annual Sohn Investment Conference on Monday. “But the moment we could, we bought it. You could say we’re late to the party.”
Ackman’s Pershing Square has now invested 20% of its capital into Valeant, Ackman said. His investment thesis is based on Valeant’s track record of acquisitions, which have—other than with Allergan—mostly succeeded, Ackman said. After all, Valeant has acquired 100 companies over the past seven years, including Bausch & Lomb, and is hungry for more, according to Ackman.
“The story is not that well understood by Wall Street….They’re incredibly talented at getting deals done,” Ackman said. He sees Valeant doing between $7 billion and $20 billion worth of acquisitions per year. “We think these are very reasonable assumptions.”
In Ackman’s view, Valeant isn’t merely a pharmaceutical company, but rather a “platform company” that systematically makes acquisitions in order to increase its own value. Indeed, Ackman compared Valeant to a special purpose acquisition company, or SPAC—a shell company created for the purpose of buying other companies. “Platform companies have unique management, so assets they buy are worth more to them than anyone else,” said Ackman, citing Danaher (DHR) as well as John Malone’s Liberty Media (LMCA) as examples.
And yet, the market generally values companies based on assets they already own, rendering Valeant and other such platform companies perennially undervalued. “The problem with that methodology is it assigns no value to the company’s ability to make transformative transactions,” Ackman said.
Ackman has also invested in several true SPACs, and he says the experience helped him recognize the value in a serial acquirer like Valeant. (Ackman’s SPAC investments have mostly been in those created by his friend Martin Franklin, founder of Jarden Corp. (JAH). Franklin and Ackman are tennis buddies, as well as fellow supporters of charitable causes.) Noticing that the value of the shell company would double the day after it made an acquisition, Ackman wondered: Why didn’t more investors realize that they could double their money just by investing before a deal was announced?
Indeed, Ackman observed a similar pattern with Valeant, such as when it bought Bausch & Lomb. “Everyone in the world knew that Valeant was looking to make acquisitions but it wasn’t ’til the day that they announced the acquisition that the stock jumps from $70 to $90,” Ackman said. Similarly, when Valeant announced in February that it would buy rival Salix Pharmaceuticals, its stock price jumped from $161 to $196, Ackman said. “Shareholders should not be allowed to make this much money—it simply means the stocks are not being valued correctly,” Ackman said. “This is a huge opportunity for investors.”
With the Sohn conference happening on the heels of Warren Buffett’s Berkshire Hathaway annual meeting, Ackman finished with an observation that likely resonated with many of the investors in the room who had just returned from Omaha. Berkshire Hathaway was the quintessential platform company, Ackman said, and still it had been “continually undervalued” for its entire history. “You’d think after 25 years people would realize,” Ackman said. “And Valeant is a very early-stage Berkshire.”
Clarification, May 4, 2015: This article has been updated to more accurately reflect Pershing Square Capital’s role in Valeant’s attempted takeover of Allergan.