Excerpted from an email which Whitney Tilson sent to investors.

Boy, this article in Forbes is a really lousy piece of journalism. If you read the headline (“Pershing Square’s Investment Team, Led By Ackman, Made $509 Million In Down 20% Year”) and first five paragraphs, you’d think that Bill Ackman and his team made a fortune in 2015 despite big losses for investors in Pershing Square. This is truly idiotic and exactly contrary to the truth – in reality, Pershing Sq. got paid in early 2015 for its huge gains in 2014, which the article finally notes in the sixth paragraph:

This pay mostly includes compensation from 2014 performance, a year when Ackman & Co. lapped the hedge fund industry with net gains of nearly 40%. Bonuses on Wall Street are often paid in the New Year. It seems this drove a big spillover from Pershing Square’s winning 2014 into its catastrophic 2015.

There are a lot of fair criticisms one can make of Ackman and Pershing Sq., but making out like bandits while investors suffer is NOT one of them. No one has lost more than Ackman himself over the past three quarters, as the article belatedly notes:

Employees led by Ackman own a significant chunk of Pershing Square, meaning losses cut deeply into their wealth. FORBES calculates that Ackman has personally lost $1 billion since Valeant’s tumble began in the third quarter of 2015.

PS—The just-released annual report for Pershing Square Holdings is posted here; here’s the section on VRX (which I’ve never had any position in):

 

Valeant Pharmaceuticals International (VRX)

Business is fundamentally about trust and confidence. Without trust and confidence, business value can

vaporize quickly. Valeant Pharmaceuticals is a case in point.

Since its high in August 2015, Valeant’s stock price has declined 87%. During the week of March 14,

2016, the stock declined 58% as shareholders dumped Valeant stock regardless of fundamental value for

fear the company would lose access to capital.

The loss of confidence was caused by a combination of questions raised about Valeant’s accounting,

drug pricing, government investigations, reduced earnings guidance for 2016, and a near total information

vacuum compounded by continued attacks from critics, the media, and short sellers. Without access to

adequate information from the company, shareholders had no choice but to assume the worst. Owning

Valeant was perceived to be a career-ending decision going into the weekend for most investment

managers.

In order to protect our investment and help stabilize the company, we implemented a straightforward plan.

First, we put ourselves in a position of influence and gained access to inside information. Steve Fraidin,

our Vice Chairman, was invited to join the board on March 9th along with two other new directors: Dr.

Fred Eshelman, a pharmaceutical industry entrepreneur, and Thomas W. Ross, former president of UNC

and a former Superior Court judge.

Since Tuesday of last week, beginning a few hours after Valeant’s earnings call, two members of PSCM’s

investment team have been spending time at Valeant so that we can have a better understanding of the

company’s operating performance, verify management’s revenue, earnings and cash flow guidance for

2016 and build our own financial model for the company. Bill Ackman attended board meetings as an

observer beginning on Thursday and through the weekend, and officially joined the board on Monday

morning. We have been given access to information and to management necessary for us to conduct

due diligence and assist the company.

The new board worked collaboratively over the weekend to understand the conclusions to date of the Ad

Hoc Committee’s investigation of Valeant’s accounting and to discuss CEO Mike Pearson’s continued

candidacy as CEO.

On Monday morning, the company filed a press release and 8-K that announced:

1)     CEO Mike Pearson will be stepping down as CEO once a new CEO is identified;

2)     Bill Ackman joined the board;

3)     The Ad Hoc Committee’s investigation of accounting issues is nearing completion, and does not

4)     anticipate additional issues that have financial statement implications;

5)     Valeant will restate certain past period results for $58 million of revenue booked in Q4 2014 when it

6)     should have been recognized in Q1 2015;

7)     The company is expected to file its 10-K no later than April 29, 2016, which is within the cure period

8)     for the company’s outstanding bank debt and bond obligations;

9)     The company will seek an extension from its banks to file in the event there are further delays; and

10) The company explained the reasons for its delayed 10-K filing.

Steve Fraidin, along with the audit committee, management and the company’s advisors, has worked to

assist the company in completing its 10-K filing by April 29th, within the cure period for both the

company’s bank facilities (without regard to any extension created by the bank waiver process) and

outstanding bond indebtedness. This is a work in process, but the company is committed to meeting its

goal.

One of the greatest threats to the company’s performance is the morale issues created by a collapsing

stock price, constant attacks in the media, and the inherent uncertainty of the events of the last few

months. Senior management has done a good job retaining talent and it is imperative that the company

continues to do so.

On Monday afternoon, Valeant’s Chairman Bob Ingram, CEO Mike Pearson, and Bill Ackman spoke with

Valeant employees at its Bridgewater, N.J., United States headquarters and explained how appreciative

the board and shareholders are of their willingness to work hard and stay focused under difficult

conditions, and to answer any questions that they may have. We believe that Monday’s announcements

will begin to calm the 22,000 people who work for Valeant as the inherent uncertainty of the situation has

diminished significantly and the stock price has begun to rise.

While trust and confidence can vaporize quickly, it also can be restored rapidly when appropriate

governance, oversight, and management issues are addressed properly. We believe that when the 10-K

is filed, new leadership is identified, and the market understands that Valeant has adopted a new

approach to communicating with the public, investor confidence will be restored and the stock should

trade at a price which better reflects its business fundamentals.

 

Whitney Tilson
Whitney Tilson