Pershing Square’s Bill Ackman spoke with Bloomberg Television’s Stephanie Ruhle at the annual Sohn Investment Conference in New York. He spoke about the value of shareholder activism, the restaurant franchise and pharmaceutical industries, investment strategy and his position on short selling after his campaign with Herbalife. Ackman also discussed the outlook for Fannie Mae and Freddie Mac.
On short selling, Ackman said: “I would have to think very, very hard before another public short…You do all the work. You suffer all the spotlight, and the criticism and some amount of reputational damage from inaccurate articles in the press. Is it worth that investment in exchange to make a profit? There are easier ways to make money.”
When asked about Berkshire’s future post-Warren Buffett, Ackman said: “I’m not worried about Berkshire needing an activist for a generation…I think he’s done a remarkable job setting the company up to succeed even after he is gone.”
Warren Buffett’s 2018 Activist Investment
On his recent One57 apartment purchase for nearly $100 million, Ackman said: “It was an investment…I bought it at a very attractive price, believe it or not. And I think it’s — it may be the best apartment in the world.”
Bill Ackman Would Think ‘Very Hard’ Before Next Short Bet
STEPHANIE RUHLE: Bill, always great to have you here. I got to start with a friend/foe of yours, Carl Icahn.
BILL ACKMAN: Right.
RUHLE: We’re just heard from Carl, friend, over the weekend, Carl making comments following Larry Fink, talking about his view on activism and what it’s doing to CEOs. What do you think the value of activism is right now?
BILL ACKMAN: I think it’s critically important, which is why it’s getting so much sort of press attention. And I think what’s happened is the balance of power has been shifted back to the owners of the business in a very dramatic way, I think in the last 10 years, really as a result of the growth of shareholder activism.
RUHLE: But what about the argument that corporate CEOS are not making responsible long-term decisions because they’re scared, they’re under their desk saying, damn, I hope Bill Ackman doesn’t call.
BILL ACKMAN: And the kinds of changes that we propose, the kind of changes that an excellent activist proposes, are not short-term changes to derive short-term value. They’re changes to fundamentally improve a business over many, many years. They are long-term changes.
Now there are some shareholder activists who push for large levered buybacks and things like that that have a short-term benefit, and it might be long-term detrimental. But for the most part, most of the activists I know, you look at Nelson Peltz, what — the kinds of changes he is proposing at DuPont, these are fundamental long-term business changes. You look at what we have accomplished at Canadian Pacific, Howard Hughes, the other companies we invest in. These are changes for the benefit of a company over a long term.
I think management should be able to ignore short-term driven, cause a pop in the stock, but damage the business. Those changes should be ignored. But the biggest fear that a CEO has, is if he or she is underperforming, then it’s likely an activist will show up, not for the short-term reasons, but for long-term reasons.
RUHLE: We know you had huge success in Burger King. So most recently we’re talking Yum! Brands. Keith Meister is involved. Dan Loeb is involved. Do want to get in this game? You know how well that — you know well how this space works.
BILL ACKMAN: Look. I think the — the franchise business is one of the great businesses of the world, run correctly. I think the folks at restaurant brands, now previously Burger King, are — have done a fabulous jobless with Burger King and they’re — are going to continue to do the same with Tim Hortons. And we like that team. I hope Keith does very well, and Dan with — with Yum!. I think it’s a good company, a lot of potential.
RUHLE: Well health care and drugs seems to be sort of the area du jour for you, whether we’re talking Allergan, Valeant, Zoetis. Are they going to get bigger than that?
BILL ACKMAN: Possibly. I mean I think what’s interesting about health care is health care companies have never been run — many of them are not run to the benefit of the owners. Many of them are very wasteful in the way that they operate their businesses. When you have a business with 80 to 90 percent gross margins, it makes you much less disciplined about cost control. And so that’s created an opportunity.
And also you have the pressures to keep health care costs down. And those combined I think are creating a lot of opportunities for combinations and efficiency. And Valeant has really been leading the charge in changing that whole sector. I think Actavis is doing sort of similar things. And so you’re seeing an industry in transformation in a very dramatic way.
RUHLE: You’ve got two board seats with Zoetis right now. Are you seeing the changes that you want?
BILL ACKMAN: So Bill Doyle from Pershing Square joined, Paul Bisaro, really independent of Pershing Square. Obviously he’s the executive chair of Actavis, very excited that he has joined the board. The company is going to announce earnings I think within the next few days or so. Obviously I can’t comment, but I think it’s a great company and will do very well over the long term.
RUHLE: When you look at companies to take a big stake in, to — to play your role, and do you have more success with smaller or larger companies? Who’s more responsive?
BILL ACKMAN: I think everyone is responsive today. If our — if our ideas are good, management teams and boards are generally very responsive.
RUHLE: Are there some companies or industries that just don’t make sense for you? For you to look at a Berkshire Hathaway, would you say, too big, could never get real control, doesn’t make sense?
BILL ACKMAN: So it really doesn’t make sense. I think Warren Buffett is one of the great CEOs of all time. I think he’s done a remarkable job building a business. And I think it’s one of the few cases where you can justify the conglomerate structure of the business. So I would rather be a passive shareholder of Berkshire than — I don’t think there will be an activist at Berkshire.
Look, perhaps — the real question is what happens after Buffett is gone? What does the company look like 20, 30 years from now? It’s never — it’s rarely while the founder is alive, and a major shareholder that a business needs a shareholder activist. It’s when there is no longer an owner in the boardroom. And so I’m not worried about Berkshire needing an activist for a — for a generation.
RUHLE: But are you worried about Berkshire’s future post-Warren Buffett? He’s not a young man.
BILL ACKMAN: I think he’s done a remarkable job setting the company up to succeed even after he is gone, right? It’s a very auton — it’s a — there various subsidiaries where they run themselves on an autonomous basis. It’s a very decentralized company. And they have got some very important guiding principles. And he’s focused a lot on building a culture. I was there. I went to the annual meeting this weekend. It’s a great ritual. I got a lot of value out of doing it, but he has done an incredible job kind of engraining a culture in the company with a goal of it surviving him.
But I am sure he has those kinds of concerns. A lot of — it’s — it’s when Sam Walton is gone that’s when you worry, and when Warren is gone. And a lot of companies have not done a good job transitioning to the next generation, which has created the opportunity for shareholder activists.
RUHLE: Let’s talk short selling.
BILL ACKMAN: Sure.
RUHLE: you have said in the past you don’t see yourself launching into a campaign like you have with Herbalife again, given what an overhaul it has been.
BILL ACKMAN: Sure.
RUHLE: Do you still feel that way?
BILL ACKMAN: Yes. Look, I think short selling is an inherently healthy thing for markets. I think it’s very good for outing fraud, but it’s not a — it’s not a great and productive use of time. And —
RUHLE: Because of all the capital?
BILL ACKMAN: No, no, not the — well I would say is just something that is still, no matter what the track record of the short seller is in identifying fraud or problematic companies, you come out publicly and say a company is violating the law, people are immediately skeptical of your motives, and so on and so forth, because you have an opportunity for profit if the business fails. So they say you are saying it simply because you are trying to make a profit.
It’s just not worth the — it’s not worth the brain damage, I would say. So I would have to think very, very hard before another public short. I’m going to finish this one, but the question is we get involved with another is another big question.
RUHLE: But you’re saying you still think short selling makes sense. What about regulatory?
BILL ACKMAN: I think short selling makes sense from a — for the markets. I think it’s a very healthy thing. I think it’s very good for regulation. I think it’s very good for outing fraud. The question — there’s a big public good problem, right? You do all the work. You suffer all the spotlight, and the criticism and some amount of reputational damage from inaccurate articles in the press. Is it worth that investment in exchange to make a profit? There are easier ways to make money, I would say.
RUHLE: Well in terms of getting CEOs to take action based on your suggestions, isn’t that significantly easier than a regulatory short —
BILL ACKMAN: Yes.
RUHLE: — when you’re in the black hole of the U.S. government?
BILL ACKMAN: Yes, for sure. Now the good thing about a good short is the fundamentals in the case of Herbalife will likely take the company down, will take the company down probably before the regulators do. We expect a very bad quarter tomorrow. We expect continued deterioration of the business. And I’d love to see the regulators finish their work, but —
RUHLE: Well worse than regulators not doing their work, sort of your position when it comes to Fannie, that’s not the regulators not responding. That’s the government saying we just simply disagree, and we’re the rule makers. So where do you stand on that?
BILL ACKMAN: So on Fannie/Freddie we think, one, I think is going to make a good long-term investment, but I — I underline long-term, but two, I just I don’t think there is an alternative solution to preserving the housing finance system in the U.S., right? If you want a 30-year pre-payable fixed rate mortgage, which is a fixture of the housing finance system, I don’t think you can have it without Fannie and Freddie.
And so, therefore, just the truth will prevail. The best outcome here for the taxpayer is that the company is preserved. The best outcome for kind of the credit markets is that the company is preserved, the best outcome for the shareholders. So I don’t — I don’t see who’s harmed by Fannie Mae staying in existence. I think the thing that — the debate should be about how much capital Fannie and Freddie hold, not whether or not they continue to exist.
RUHLE: Are people even willing to have that debate though? Are they looking at what Fannie and Freddie are doing? Or are they just too overwhelmed, saying I just don’t want a rich guy to get richer? That seems like the issue people are taking.
BILL ACKMAN: I don’t think so. I think with respect to the Fannie Mae common stock, I think most of the common stock is held by individual investors. There are probably hundreds of thousands, if not millions of people who own Fannie Mae and Freddie Mac common stock. And so I — I think, yes, Pershing Square is a significant shareholder, but 80 percent of the company is actually owned by the taxpayer. So the only way the shareholders of Fannie and Freddie get rich, if you will, is if the taxpayer gets — does very, very well.
RUHLE: And is Fannie and Freddie clearly a long-term trade for you, Herbalife a long-term trade for you?
BILL ACKMAN: Herbalife is a short-term trade.
RUHLE: And I’m not talking —
BILL ACKMAN: Herbalife is a short-term trade.
RUHLE: Well it’s taking a while.
BILL ACKMAN: That’s for sure.
RUHLE: Then do you think people don’t have a correct perception of what activist investing is, since they say, these guys just pump and dump. They’re in and out. You’re not in and out of anything though.
BILL ACKMAN: No, no. We’re very long term. I mean we’ve been in Howard Hughes for six years. We’ve been in Canadian Pacific now for four years. We’re — we’re a long-term holder. We’ll own these businesses for years. So I think it used to be that you criticized an activist for being short term, and perhaps there are some short-term activists, but the good ones are long-term investors, business builders. They’re people that are trying to create long-term value.
RUHLE: Last week your friend, Carl Icahn, said he’s mildly bearish on equities, majorly bearish on the high-yield market. Where do you stand?
BILL ACKMAN: Yes. I agree.
RUHLE: You agree.
BILL ACKMAN: Well the overall level of interest rates is about as low as it can get. And the credit markets are pretty tight. Credit spreads are pretty tight. So your — the absolutely yields you can earn owning below investment grade credit are very low. And so it’s hard to make a lot of money buying a bond with a 4.5 percent coupon unless the credit is going to improve. And I think that’s still a tough, a tough bet. You can be right on the credit improving and interest rates move. I’m not a — I don’t like fixed income as a category, particularly at today’s interest rates.
RUHLE: And does the timing on — we have somebody walking by. Does the timing on Fed action mean anything to you?
BILL ACKMAN: Not really. We focus on a few companies. We’re not trading the market.
RUHLE: Then for you right now, what is the most important thing to your business?
BILL ACKMAN: Integrity, doing the right thing, focusing on our — the businesses we own, making sure the right management team is in place, the company is making smart decisions about the way they run their business, the way they allocate capital. Those are the things that matter to us, and finding the next idea. We’ll have something new to talk about probably in a couple of months.
RUHLE: In a couple months.
BILL ACKMAN: Yes.
RUHLE: All right, $100 million on an apartment. What are you going to do with that place?
BILL ACKMAN: So it was an investment. I thought —
RUHLE: An investment.
BILL ACKMAN: Investment, yes. I think I bought it at a very attractive price, believe it or not. And I think it’s — it may be the best apartment in the world. And someone —
RUHLE: Hold on one second.
BILL ACKMAN: And someone will pay a very big —
RUHLE: You think $100 million is a good price?
BILL ACKMAN: It wasn’t 100, but it was like 90. But, however, I paid $6,500 a square foot. Apartments on the park in Vornado’s new building are selling at $10,000 a square foot. So I’m already 50 percent of the money. And this is by far the best apartment. So if you’re interested, and you’re — you were as interested —
RUHLE: So it’s an investment. You never plan to live there.
BILL ACKMAN: No, no. I live a much quieter, nice life, nice family apartment.
RUHLE: Do you get to negotiate the brokerage fee? I mean the brokerage fee on a — on $100 million apartment, you’ve got to be able to negotiate that down, right?
BILL ACKMAN: I’m sure you can.
RUHLE: Bill, thank you so much.
BILL ACKMAN: Thanks very much, appreciate it.
RUHLE: Bill Ackman. He’s going to be speaking later this afternoon here from Sohn 2015.