[“Life is far too short to spend it immersed in an unhealthy relationship.”—Jeffrey M. Cohen, Esq., professional mediator.]
This week (March 13, 2017), billionaire Bill Ackman exited one of the most disastrous hedge-fund relationships of all time, selling his Pershing Square’s remaining shares in Québec-based Valeant Pharmaceuticals. The move brings to a close one of the most ruinous investment relationships in the hedge fund’s history.
NYC-based Pershing Square lost more than 90% of its investment as Valeant plummeted into financial crisis, and Ackman most likely concluded that the tax losses would be more valuable to Pershing than any potential rebound in the stock, says Seeking Alpha.
“At its current market value, the Valeant position represented 1.5% to 3% of the various Pershing funds. However, the investment required a disproportionately large amount of time and resources,” Pershing said in a statement Monday (March 13, 2017).
News that the “smart money” had exited the long-suffering relationship sent Valeant stock down 11% to $10.76, from a record high of $263.81 in August, 2015. Shares have rebounded slightly and are now down 9% on the week. CNBC first reported that Pershing sold its entire Valeant steak at levels of $11 per share.
Ackman made and lost billions over Valeant, but ultimately the investment was, by Ackman’s own admission, “one very big mistake,” according to Forbes. It fueled losses in Pershing’s main hedge fund of 16.7% in 2015 and 10.2% in 2016. Assets under management at the fund plunged from more than $20 billion in the summer of 2015 to $11 billion and Ackman fell off the Forbes 400 list of richest Americans.
The way Ackman sees it, his Valeant holdings wouldn’t “move the needle” for his fund, even if the stock “doubled from here,” he told CNBC.
As Wells Fargo analyst David Maris reckons, the move could mean more bad news for the company is coming down the road.
“Some would argue that as an insider, Pershing Square has a better vantage point from which to judge the current challenges and prospects for Valeant,” Maris wrote in a note to clients. “We believe investors would consider this a sign that the next several years may not represent a major turnaround for the company.”
Like Maris, I thought I had seen all the bolts from the blue–Philidor, drug pricing, former CEO Mike Pearson’s sudden illness and even quicker exit, the hostile response to R&D–and felt that the story for a rebound wasn’t that farfetched.
Then the latest (and maybe final) bombshell came with news of Ackman’s throwing in the towel on the beleaguered relationship.
Ackman, for his part, has gone above and beyond that of a typical activist investor. Behaving more like a loyal-to-the-end spousal partner, the billionaire has been particularly outspoken about the promise of Valeant, even hosting a multi-hour call for journalists and analysts in November 2015 defending the company, BioPharmaDIVE points out.
Also in 2015, Ackman and Pershing Vice Chairman of investment management Steve Fraidin joined the board of directors at Valeant to help “stabilize and rebuild the company.” Ackman and Fraidin will now vacate their seats on the board.
This wasn’t an overnight swan dive from $262 per share to $10.50. It’s been a long-slow death, even as new CEO Joe Papa insists Valeant is in the midst of a transformation in turnaround.
You win some and you lose some on Wall Street and in life. For billionaire investor Bill Ackman, Valeant may very well represent the worst investment of his lifetime.
Yes, in a nutshell, Valeant is a disaster. But to his credit, Ackman realizes his mistake, doffing his ego for all to see, and walking away with $221 million rather than risk seeing his investment get crushed even further. It typifies the “glass is half-full” mentality of a minuscule club of successful investors like Ackman who have at times lost billions.
Why not hang in even longer with his investment despite having already lost nearly 95%? Simple answer: Ackman’s investment thesis for the relationship with Valeant no longer held true.
He had bought into Valeant with the assumption its M&A engine could generate between $7 billion and $20 billion in annual acquisitions. He was also convinced Valeant possessed strong pricing power and a crack management team. These imaginings proved misguided.
Like in a bad marriage, hindsight is frequently 20-20. Yes, it was a terrible move to buy Valeant, but selling is probably the smartest thing Ackman can do, given the company’s bleak outlook.
If he’s taught investors anything, it’s that even the smartest ones, and he’s definitely proved himself worthy of that category, are wrong occasionally, and it’s perfectly alright to cut and run if the relationship no longer matches your investment thesis.
I’ll leave off with several platitudes about why divorce in the investment cosmos is preferable to staying in an unhappy, costly relationship with your portfolio.
- Marriage may give you a sense of security; the divorce gives you a new lease on life.
- Divorce clears the way for you to meet the right investment partner.
- You and your present partner may be stifling each other’s growth.
- Finally, you lose a spouse but potentially regain happiness.
I won’t speak for either Bill Ackman or Valeant. But my sense is both will be better off putting what turned out to be a disastrous partnership behind them and move forward to bigger and better things.Steve's Take: Bill Ackman & @Valeant are better off putting partnership behind them Click To Tweet
If you still hold Valeant, you might consider doing the same.