One Billion Reasons for Ackman’s Love Affair With Valeant’s Pearson

Bill AckmanBill Ackman Photo via InsiderMonkey, Flickr (CC BY-ND 2.0)

Pershing Square hedge fund manager William Ackman and Valeant Pharmaceuticals CEO Mike Pearson are a match made in heaven.

$1 billion in paper profits after announcement made

Ackman must have pretty sweet thoughts of the relationship.  After tallying nearly $1 billion in short term gain on his largest bet as a hedge fund manager – an event that took less than a few minutes as Valeant announced the acquisition of Botox marketer Allergan in after-hours trading yesterday –Ackman was all smiles with his new partner Pearson.  Not a bad day’s pay for doing nothing more than providing a little muscle to Valeant’s takeover offer.

Valeant has been down this road with Allergan before, having unsuccessfully tried to purchase the company nearly one year ago.  Allergan rejected the bid then, so what’s different this time?  The Ackman muscle.  Just like a hockey fighter intimidating the opposing team before the game begins, the Allergan board must be studying the impact a fight with an activist hedge fund manager might have on their personal lives.  Just ask eBay board member Marc Andreessen how activist hedge fund manager attacks can get personal when they don’t get their way.

Ackman and Pearson make the perfect Batman and Robin duo.  Ackman is the high-profile hedge fund manager who cuts a swashbuckling image as he instills fear in corporate boards, while Pearson is the behind-the scenes bean counter concerned with immediate synergistic cost savings that comes from rolling up an industry.

Planning their next soiree together

In the video broadcast press conference, Ackman and Pearson joked they were planning their next deal, with the numbers guy Ackman lauding better-than-expected cost savings Valeant has delivered in past deals for Biovail, Medicis and Bausch & Lomb. “They really have a perfect track record of achieving synergies.”

The Ackman-Pearson love fest continued when Ackman cited the book The Outsiders that Ackman calls possibly the most important book he ever read. The book says CEOs who are the best investors and run lean companies are best for shareholders. “The only problem with the book is it left Mike [Pearson] out of the book,” Ackman says.

Ackman discussed that magical moment that attracted him to Valeant and Pearson, giving credit to newly-minted Pershing Square employee Bill Doyle, who counted beans with Pearson at McKinsey and was a former Johnson & Johnson executive. Doyle introduced the two and the magic just happened.  Ackman conducted extensive due diligence, looking at the firm from a short perspective to make sure it wasn’t another short opportunity like Herbalife, a comment that was said to draw laughter.

The first target in the Allergen takeover is going to be product innovation. The company will likely cut research and development and reduce corporate overhead.  In fact Schiller breaks down the $2.7 billion in synergies: $1.8 billion is cost savings, $900 million is in revenue.  When asked if he thought Allergan management would agree with significant cuts to head count, with a potential 90% cut in R&D, Ackman was clear.  “We don’t think that Allergan management would be at all okay with cutting their R&D by 90%, that’s the opportunity.” Ackman then said there are plenty of “talented people” at Allergan who will find jobs in a combined company, but the dominate issue is to do what’s right for shareholders.

While product innovation might get the shaft, the sales force will likely remain on top.  “I’m sure a fair amount of the Allergan sales force around the world will be part of the new company,” Pearson said when considering potential cuts.

The bean counting love affair between Ackman and Pearson was on display when at the event Ackman requested a Chipotle burrito instead of a salad, and Pearson asked him for $20 to cover the special request.  The event kicked off with Pearson noting that “I assure you Valeant still cares about every penny. Bill Ackman paid for this (press conference broadcast over the Internet).”

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About the Author

Mark Melin
Mark Melin is an alternative investment practitioner whose specialty is recognizing a trading program’s strategy and mapping it to a market environment and performance driver. He provides analysis of managed futures investment performance and commentary regarding related managed futures market environment. A portfolio and industry consultant, he was an adjunct instructor in managed futures at Northwestern University / Chicago and has written or edited three books, including High Performance Managed Futures (Wiley 2010) and The Chicago Board of Trade’s Handbook of Futures and Options (McGraw-Hill 2008). Mark was director of the managed futures division at Alaron Trading until they were acquired by Peregrine Financial Group in 2009, where he was a registered associated person (National Futures Association NFA ID#: 0348336). Mark has also worked as a Commodity Trading Advisor himself, trading a short volatility options portfolio across the yield curve, and was an independent consultant to various broker dealers and futures exchanges, including OneChicago, the single stock futures exchange, and the Chicago Board of Trade. He is also Editor, Opalesque Futures Intelligence and Editor, Opalesque Futures Strategies. - Contact: Mmelin(at)valuewalk.com

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