Home Top Stories Bill Ackman On Allergan, Valeant, Herbalife [FULL TRANSCRIPT]

Bill Ackman On Allergan, Valeant, Herbalife [FULL TRANSCRIPT]

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Bill Ackman, CEO at Pershing Square Capital, and Michael Pearson, Chairman/CEO at Valeant Pharmaceuticals Intl Inc (NYSE:VRX) (TSE:VRX), spoke with Bloomberg Television’s Stephanie Ruhle and Erik Schatzker today about their joint bid for Allergan, Inc. (NYSE:AGN) and explain how and why they partnered for the deal.

When asked if he is a corporate raider, Ackman said “No, no one is being raided.  Actually what we’re doing is we’re helping facilitate a transaction between two companies for the benefit of the shareholders.” On whether Allergan, Inc. (NYSE:AGN) would feel the same way, he said “I don’t know, you have to ask them.”

Bill Ackman said “The entire pharmaceutical industry is changing.  There is a dynamic happening.  Why is there so much opportunity for synergies?  And the answer is there is a lot of costs in this industry.  It’s one of the few industries which has not been forced to operate with the same kind of economic discipline as other industries.  And I think that Mike [Pearson] and his team had been a driving force in leading the charge and making this a much more shareholder-oriented industry and making this a much more profitable industry.”

On Herbalife Ltd. (NYSE:HLF), Ackman said: “I don’t think this stock gradually goes to zero. I think it’s more of an overnight phenomenon. You have a criminal investigation in the Department of Justice. The FBI have launched a criminal investigation….For the FDC to go to a formal investigation here with the vote of the commissioners – what they’re telling the market is, they certainly see some evidence of serious problems at the company. And the FDC’s track record of going after pyramid schemes is pretty much, they’ve got about 100% batting average.”

Highlights from Bill Ackman include:

  • Short termism in investing is bad
  • Entire pharma industry is changing
  • He’s never before invested in pharma
  • Valeant more like procter & gamble than biotech
  • Valeant business model more efficient than rivals
  • “No-one’s being raided’ at Allergan
  • Stock & cash offer is win-win for shareholders
  • Pearson makes full & fair offers, not overpaying
  • Valeant-allergan easily $200 stock when deal closes
  • Simplest trade is to `buy Valeant stock’
  • Doesn’t think Herbalife stock gradually goes to zero
  • Herbalife demise `more an overnight phenomenon’; investigations serious

Bill Ackman’s Full 30-minute interview

Bill Ackman: Herbalife at Zero an Overnight Phenomenon

ERIK SCHATZKER:  Michael, why don’t we begin with you?  You run Valeant.  Ultimately Valeant’s going to be acquired here, take on Allergan’s assets and employ the synergies that you believe that you can gain.

There is a good reason why everyone is so fascinated by this partnership that you’ve formed with Bill Ackman, innovative, unprecedented, et cetera, et cetera.  But I think what the market is still struggling to understand is why you could not do this on your own.

Why couldn’t Valeant have gone out and bought a bunch of OTC call options and forward contracts and taken a 10 percent position in Allergan by itself?

J. MICHAEL PEARSON:  I think a number of reasons.  One is Bill and Pershing Square is much better at trading and doing that type of thing than we would ever be able to do.  We don’t have people with those capabilities.

Second is we did not have $4 billion to put at risk.  Mr. Ackman and his team have contributed $4 billion towards our cause.  They now own 10 percent and they could be an independent voice to Allergan’s.  They’re the largest shareholder Allergan has.

Finally, in terms of the probability of this deal being done, having a third party that is validated our model, fit our business  and truly believes the combination is terrific for shareholders in the short and long term is a huge asset.

SCHATZKER:  Can I just follow up on each of those points very quickly?

First is you are absolutely right, Valeant does not have the share purchasing expertise that Bill does, but Goldman Sachs does, Morgan Stanley does, JPMorgan does.

PEARSON:  We would have to pay for it.

SCHATZKER:  OK, we’ll get to that in one second.

The second point that you made, which is about remind me, the third point was the fact that you would have Bill helping to force through an acquisition.  Let’s get to that then.

I have met and know a number of arbitragers.  If you put a deal on the table for Allergan, the arbs would help to drive that forward wouldn’t they?

PEARSON:  And we hope they will.

SCHATZKER:  They are right now I’m sure.  They’re in the stock.


SCHATZKER:  And remind me what the second point was.

PEARSON:  I think the second point was we had someone independent coming in and validate our operating model and that Bill is not just buying, hoping this transaction goes through but he is committed to being a long-term investor.  So he sees the short-term opportunities as well as the long-term opportunity for Valeant.

BILL ACKMAN:  All right.  If this were an all-cash deal, I think we would add in some ways less value.  But because part of the — a meaningful part of the consideration is what you’re — really  what you’re doing, if you’re an Allergan shareholder, is you’re becoming a shareholder in the combined enterprise.

And your ultimate outcome depends on how this business does over the next several years, five years, 10 years, if you’re a long-term investor.

And before we were ready to participate, we had to be comfortable with Valeant’s business.  And they have got an incredible track record.  Stock’s done extremely well.  But it is still, I think, a very much misunderstood company.  One of the things we thought we could do is help — once we understood the story and validated the business model, we could help the market understand why this is — it’s more — I would much rather sell for stock in Valeant than sell for cash, which is why I’m electing stock in the transaction.


RUHLE:  How many acquisitions have you made?

PEARSON:  It’s well over 100 acquisitions.

RUHLE:  And how big is your integration team at Valeant?  One would think that would just take a huge amount of manpower to get through all that.

PEARSON:  Actually we do not have a specific integration team.  Our managers know how to integrate.  So the line people are involved in the integration.  The fact we are decentralized makes it a lot easier.

So if we buy assets like Allergan’s we have a whole Polish team — Bill was over there and met them — so we have a Polish team that will take those assets and build — and put them into their decentralized operation and we can do that very, very quickly.

And our people are very experienced both at running companies but also integrating.  It’s is core competency.

RUHLE:  Is there a model we could look to, an acquisition that you have made that you have said, here’s what it looks like; we bought it and now here is the success story?   Just to give us a better understanding.

PEARSON:  I think our most recent acquisition, Bausch & Lomb, is a terrific company, everyone has heard of it.  We closed and five months later, it is completely integrated.  The organic growth in the company has accelerated since we bought it.  Their pipeline is producing a bunch of new products for us.

The people in Bausch & Lomb, especially the ones outside the U.S. that are part of the decentralized model, love it.  They like not having corporate telling them what to do.

SCHATZKER:  Now I now remember the point that you made.  Let me put it to Bill.

You said that Bill put $4 billion at risk.

Do you have $4 billion at risk?  If I did some back-of-the-envelope math — and I’ll admit that I am not a mathematician, but the OTC contracts did not cost $4 billion.

Bill Ackman:  Yes, they did, in effect.  We own a 1 percent strike call option.  And as soon as we get FTC approval, we will acquire the underlying shares.  So we are at the exact same exposure economically as if we own the stock.  So we’re exposed to $4 billion with the stock.  We have got a post collateral, billions of dollars —


SCHATZKER:  Oh, there’s a collateral with the counterparty?

ACKMAN:  And when we close on the stock, as soon as we get FTC approval — by the way, the reason why you do this is the FTC does not,  when you buy more than $75 million of stock in a company with an intent to influence and control the business, you cannot buy shares that carry votes until you get approvals from the government.

So what the government allows you to do is buy a stake first with options, get approval, once you get approval, you can acquire the shares.

But we are exposed — every dollar that Allergan stock goes up, we benefit.  Every dollar that Allergan stock goes down, we benefit by one dollar.  So we have the same exact exposure.

SCHATZKER:  But it’s — I mean, that is what people need to understand, the point that you’re trying to make.  It is not an option — usually confers the option to buy or sell or not to.  What you’re saying is that is not the case.  You have an obligation to exercise?

Bill Ackman:  No, it is an option.  But normally people buy an option, the stock is at 125, they might buy an option at 130.  This stock was at 125, we bought an option at a dollar.  So the very little optionality in the option.  It behaves just like the common stock.

And because we weren’t look for optionality.  We were looking for a way to be exempt from the requirement, be allowed to get economic exposure without having to file first with the FTC, which would give the company notice that we were interested in the stock.

RUHLE:  No doubt your phones — both — were ringing off the hook yesterday by a whole assortment of people.  Have the regulators said, let’s take a step back and walk through this, have those who possibly sold to you, when you were buying Allergan, are they saying,  wait a minute, maybe this does not smell right?

Bill Ackman:  Again, I have no idea what people who sold to me — we — every time we buy a stock in a company, in the vast majority of the cases the people who have sold to us are typically short-term investors who see a move in the stock price and they sell into it.  But if they had held on or they buy it back, they tend to be better off.

I mean, the people who sold General Growth (ph) to us at $.34 and is now $38 a share, they probably should not have sold.


RUHLE:  But people who sold you Allergan in the last week could say you knew something that we didn’t.

Bill Ackman:  And we did.  Absolutely.  We partnered with Valeant for the purpose of helping catalyze the combination between the two businesses.

SCHATZKER:  Lots of people have looked at this partnership and concluded there is nothing wrong or illegal about it.  But is it possible, Bill, that  it is kind of a one and done?  The SEC (ph) is already looking at closing the 10-day window that you had to file a 13(d), which allowed you to go from 4.99 percent to 9.7 percent in Allergan.

And also there is talk that perhaps the FTC and/or the SEC will look at redefining a group so that you have to be corporate buyers and not a financial buyer, let’s say, like yourself, or that perhaps the pre-notification requirement the you referred to which only applies to voting shares, would be extended to beneficial ownership through options and former contracts like you have.

Bill Ackman:  Look, I think you raise a lot of important issues.  And I think the important issue here is, if you look at — there are a lot of examples of companies that should combine, very logical merger candidates.  I’m sure you see them, I’m sure you hear about them, shareholders say, hey, why didn’t company A combine with company B?  Tremendous cost synergies, tremendous revenue synergies, better, more —


RUHLE:  Because everybody likes being a CEO.

Bill Ackman:  That is right.  And if you think it is a healthy thing for the markets to have investors like us who can take stakes in companies and catalyze corporate change like this, or who can catalyze companies to operate more efficiently, then you should allow us to continue to buy a large but minority stake in the businesses.

I think it would be wrong to wake up overnight and a company was — the control shifted to someone else.  So if someone bought 60 percent, there is an issue.  But if you think shareholder activism is a very favorable thing for stock markets, for capitalism, for keeping the balance of power between management and shareholders, then what you do not want to do is restrict activists from buying more than 5 percent of the company.  Because what that will do is it will meaningfully diminish — the people that the market lift into the world who are fighting shareholder activists are largely trying to protect entrenched management.

They make the argument that activists are short-term.  This is all short-termism.  And short-termism.  I believe that short-termism is bad.  But we’re not a short-termer.  This is the opposite of a short-term deal.

What we are saying is that the combined Valeant Allergan is a much better business than either business on their — being separated.  We committed a large amount of capital to this entity.  We have committed to elect stock in the venture.  We have a contractual requirement to own the stock for at least a year.  We intend to own it for meaningfully longer than that.  And we are a big believer not just in this transaction but what the company become once this deal gets done, we are a big believer in what happens to this company when deal two and three and four from here, you know, 102, 103, 104.

RUHLE:  Before you partnered with Bill, as you said, you have over 100 acquisitions.

How did you have the money to pay more than anyone else in deal after deal?  It just seems like an extraordinary  number to me.

PEARSON:  Well, many of the deals were small and most of them were with private companies and were not competitive.  And we have taken advantage of the low interest rate environment.  So we have used debt.

But we have deployed 6 percent money gotten over 20 percent returns on the acquisitions which, as long as we can deliver once we buy them, those returns, that is a very good business model.

Bill Ackman:  One of the points I made yesterday in our presentation is if you are a player in an industry where you have an enormous competitive advantage in terms of your cost structure, your operating strategy, your productivity, your salesforce, you can afford to pay what looks to the seller like a big price relative to what they are earning with that asset.

RUHLE:  In that style.

ACKMAN:  In that style.  In fact, that — I made an analogy yesterday, to 3G.  What Indev (ph) has been able to accomplish in the brewery industry, what they’ve accomplished with Burger King, the reason why they could buy Burger King at a premium in a public market transaction in a company that was owned by private equity, is they had a much more efficient way of running their business.

And what Valeant has accomplished is they built a business model that’s much more efficient than the entire industry.  So they can pay what is — looks a very big price to Allergan shareholders, but it is still a very attractive return because they could run the business much more efficiently.

And that is sustainable competitive advantage for the company.  And when you have an industry as large as this one, you know, it’s probably ultimately a $10 trillion dollar industry in terms of the number of public and private companies in the industry who are potential acquisition targets, you have the best operator in the industry, that is a very powerful combination.

RUHLE:  Who called you yesterday, the investment — are the investment bankers who cover you having a heart attack over this?  You put them out of business, brother.

PEARSON:  No, no —


PEARSON:  — bankers will stay in business.  No problem there.

No, we have been focusing mostly on our investors.  That is where we are spending our time.

SCHATZKER:  So the point you’re making about bankers, when I asked you that first question about why you needed to do this with Bill, you said that if I had gone to a Goldman Sachs or a JPMorgan or a Morgan Stanley or whomever, it would have cost me some money.

There’s one way looking at this, which is that it is costing you money.  You came in, Bill, at a price much lower than where Allergan stock is today.  And if this deal goes through at the price you’ve offered, it will be — you know, the difference would be considerably wider.

Why not look at this as a transfer of value from Valeant shareholders to Pershing Square?  In other words, if you had done this on your own, if you had gone and bought those call options, if you had gone and bought those forward contracts, whatever upside there would be would be upside to Valeant shareholders.

But instead, the vast majority of the upside is going to Pershing Square.  So on the point of paying for advice and capital markets activity, yes, a few hundred million bucks maybe, but not a billion dollars.  Because that is what we’re talking about here.

PEARSON:  Bill put at risk $4 billion.  First of all, we did not have $4 billion sitting at the bank.  We do not accumulate cash, we use our cash to build our business.

Second, he took real risk.  He took risk that he was not allowed — he didn’t start buying but we did not decide until Monday night with our board that we would move forward with the deal.  We could have chosen not to and there were arguments for and arguments against.  In the end of the day, I do not view it as a transfer value.

Well, the price we would have set for — paid for Allergan is the same with or without Bill.  And some shareholders will benefit.

Just so happens, if it works, Bill will benefit but our shareholders will benefit even more.  And all I care about is our shareholders.  If someone else makes money and it enables us and me to deliver more shareholder value to my shareholders, I am fine with that.

SCHATZKER:  I understand you don’t see it as a transfer.

Bill Ackman:  Erik, what some —

SCHATZKER:  The point is that some people do.  And that’s why I’m just pressing you guys on this.

Bill Ackman:  Sure, I mean, I think that’s a good question.  But I think — take the perspective — I’ll give you how I think about Valeant’s perspective.  Here they are able to get the benefit of a strategic block of the target company without putting up any capital.

We take the risk on that investment.  We have the upside and we have the downside.  They have an option to make a bid.  They can choose not to.  If they ultimately — you know, Valeant has a reputation for being a very disciplined buyer.  They don’t overpay.

If someone else comes along and pays a big price and takes it away, that is great for us and they will make some money.  But they get 15 percent of our profit.

So one of the problems with — one of the other reasons why hostile deals do not tend to happen is the hostile acquirer spends a lot of time and energy, they spend a lot of money with investment banks, they get financing commitments, and then the deal ends up getting shot to someone else and they get nothing.

Here, they get a breakup fee, in effect.  They get 15 percent of our profit on our investment without putting up any capital.

SCHATZKER:  How did you guys decide that 15 percent was the right price to align your interests because — ?

PEARSON:  It’s a negotiated thing.


PEARSON:  He probably out negotiated me.  But —

SCHATZKER:  But that — is that the right way to look at it?

PEARSON:  I’ll get more.

SCHATZKER:  Fifteen percent is the right price to align your interests because if Allergan trades at a higher price to another buyer, that is great for you and you get 15 percent, but you get 85 percent.

Bill Ackman:  Here’s what I love to do.  I would love to focus you on what is really happening here.  And I think the deal dynamics are always interesting, but I think what is happening is the entire pharmaceutical industry is changing.  There is a dynamic happening.  Why is there so much opportunity for synergies?  And the answer is there is a lot of costs in this industry.  It’s one of the few industries which has not been forced to operate with the same kind of economic discipline as other industries.  And I think that Mike and his team had been a driving force in leading the charge and making this a much more shareholder-oriented industry and making this a much more profitable industry.

One of the problems with the pharmaceutical industry is that the gross margins are so high and we have a business that makes enormous margins you tend not to focus on your overhead structure.  And what’s unique about Valeant is it’s a very high gross margin business.  But they operate as if they’re a very low margin company.  And the combination of those two things leads to extraordinary shareholder value.

RUHLE:  But what about the criticism, Michael, that you do not necessarily have organic growth?

You buy companies, you slash R&D.  You fire salespeople and then two years down the road, what happens to those drugs?  Do you just need to then churn out another acquisition?

PEARSON:  Yes, our critics say that.  But what really happens in our company is first of all, we have — we do spend money on R&D.  We are launching 19 new products in the U.S. this year.  That’s a bigger number than I think any other pharmaceutical company out there.

And since we have a different model, we do not invest in early-stage high-risk R&D.  We invest in low-risk R&D and late-stage.  So first of all, we do do R&D.

Second, in terms of sales force, our sales forces are amongst the — we have more sales reps that most companies out there.  In Poland, we have 400 sales reps and we have thousands of sales reps in places like Russia.  So we invest heavily in sales reps.  What we don’t invest in is people sitting in offices.  And people sitting offices, you need your finance team, you need your I.T. team.  We don’t need a ton of people sitting in offices, not talking to customers.  And that’s where we get the cost savings.

RUHLE:  I mean, when you look at the case, it is a beautiful case, it really is.  When you look at this, do you say, we will do this today and this special purpose vehicle, the first one, I will do this 10 more times in 10 different industries?  Because you hadn’t been in pharmaceutical industry before this.  And it is really a beautiful case.

Bill Ackman:  Well, I would say the following.  We do not want to partner with everyone.  We want people who — we want to partner with the best management teams in the industry, in industries we like and companies that have competitive advantages.  This is not about making a pop on a stock.  This is about establishing a large position ultimately in the combined company.  And that is an extremely attractive proposition, not just for us but for Allergan shareholders, for Valeant shareholders.

I think that’s a very good model.  And we can help facilitate transactions.  Again, this is a transaction that I’ve wanted to do for a year and a half.  And if we can get this done for the company and working with the company to get this done, I think that is a great thing.


RUHLE:  Hold on.

Are Glaxo, Lilly, Pfizer, are they sort of fat and happy and you’d put the screws to them right now, that everyone said, why doesn’t everyone operate like Valeant?

PEARSON:  I think we are just focused on this transaction as Bill said.  We think this can create huge value for both share — what’s nice about this one, too, is Allergan’s shareholders, they’re going to put a straight in the upside.  They will own half of this company or almost half this company when this deal — so they not only get some cash, but they get — so we are focused on this transaction and I cannot speak to other companies.

SCHATZKER:  Bill, when you say that health care, pharmaceuticals, presented this unique opportunity because it had not been disrupted, if you will, in such a fashion before, is that to say that you see opportunities for Pershing Square investors to do much more in health care and drugs?

Bill Ackman:  We’ve looked at a lot — I’ve never invested in a health care company that I can think of in 20-something years.  The reason for that is it is just a very difficult industry and particularly in the pharmaceutical business, most pharmaceutical companies, the portfolio of products, they have got a patent life and they’ve got a black box; they’re trying to invent new products to replace the ones that are coming off patent.  It is really like a venture capital business, very difficult to value a company like that.

What is unique about Valeant is it reminds us much more of the kind of companies we invest in.  This looks more like Procter & Gamble than it does like a biotechnology company.  And 85 percent of their products are the kind of products where, in health care, it is like Advil or a face cream.  It is more like beauty products than it is a lot of — I mean, Allergan has a huge R&D budget but Botox, breast implants, eyelash — Latisse —

SCHATZKER:  It is not regulated stuff?

Bill Ackman:  No, it’s highly regulated stuff, but it is more —

RUHLE:  It’s high demand.

ACKMAN:  I would argue it’s more of a consumer product and it has more of the recurring characteristics and more the brand type characteristics of the kind of businesses we like.  These are businesses that have moats around them as opposed to businesses where you’re constantly losing patent off a drug and someone introduces a generic tomorrow.

And that is why we like the Valeant model and that’s why we like the combination between the two companies.

RUHLE:  So do you feel like this invest, this partnership, you are really investing in management style and management — and structure of a company more than what the actual product is?

If that is the case, that really is a whole new way of investing.

Bill Ackman:  I go back to my 3G analogy.  What does Heinz and Burger King and Anheuser-Busch have in common?  Yes, they are all ostensibly in the food industry, but what they really have in common is an industry with very good gross margins but has not been the most efficiently run industry.

And you have operators — Buffett calls the 3G folks the best operators — some of the best operators in the world, they have applied their operating competitive advantage to an industry and they’ve been able to make some acquisitions and create extraordinary wealth for the founders of that firm.  These are three of — the founders are three of the most wealthy people in the world.

RUHLE:  (INAUDIBLE) enjoy, breast implants, French fries and beer.  Just joy products, really.

Bill Ackman:  You can call it that.

RUHLE:  All right.  We are going to have much more.  We have to take a quick break, Bill Ackman and Mike Pearson will stay with us.  This is MARKET MAKERS on Bloomberg Television.


SCHATZKER:  You’re watching MARKET MAKERS here on Bloomberg Television.  I’m Erik Schatzker.

RUHLE:  And I’m Stephanie Ruhle.

We are back with Bill Ackman from Pershing Square and his partner, his new partner, the Valeant CEO, Mike Pearson.

Mike, you’ve had other activists value has been an investor.  What have they said since all of this news come out, why didn’t you call us, we would’ve liked to have been a partner, we’re activists?

PEARSON:  So Value Act (ph) has been on the board.  In fact they were crucial to bring me into the company as CEO.  So they’ve been on our board for eight years and I’ve joined six years ago.

So they are also an activist.  But they have a different model than Bill does.  They do not — they do not invest big money ahead of time.  Their approach is more to invest in a company and get on their board and try to make changes from within, which is a different model than Bill’s activist approach.

RUHLE:  Then, Bill, what is your model?  Are you now a corporate raider?

Bill Ackman:  No, no one is being raided.  Actually what we’re doing is we’re helping facilitate a transaction between two companies for the benefit of the shareholders —

RUHLE:  You think Allergan would say they feel that way?

Bill Ackman:  I don’t know, you have to ask them.

UNIDENTIFIED MALE:  You are their largest shareholder.  –

Bill Ackman:  This is true.  This is true.

SCHATZKER:  Here’s another thing people are wondering.  What happens next?  Allergan’s already gone and poison pill provisions in place.  Even if management is open to a deal at some point, they may not be open to a deal at this price.

What will you do, Mike?  What do you anticipate, first of all ?  What do you think might happen and how do you and Bill plan to respond?

PEARSON:  I would hope after some period of time they would want to sit down and see if they can come up with something of a visit in their shareholders’ interest.  That’s their job and that’s my job.

We feel we put a very fair offer on the table and if you look at our history, we are very, very disciplined in terms of prices we’re willing to pay because we have to do what’s in our shareholders’ interest and theirs.

In this case it is nice, because both shareholders are the same.  That being said, we will sit down with them and we want to get a deal done.  But we will be very disciplined.  We think there is a lot of value on the table.

SCHATZKER:  What does that mean, very disciplined?  Because some people would translate it to mean we are prepared to walk away at this price.

Bill Ackman:  Look, here’s what I would say.  One of the reasons why we like Valeant is because they have  been — they’ve made a lot of acquisitions but did not overpay.  The value of the company, a lot — a huge part of the value of the company is based on shareholders’ confidence and management making deals that make sense.

And yes, you could buy any company if you overpay.  And what is good here is usually Valeant is bidding cash for a company.  Now this is a first transaction other than I think the Biovale (ph) transaction, which was a stock deal, the first transaction in years where they’re using stock as part of the deal, which means that there’s a win-win.  The shareholders of Allergan and going to own 43 percent of the combined company and they will get the benefit, a huge part of the benefit of the value that’s being created and plus they get $48 in cash.  So that’s a very good balance of risk and reward, they get $48 off the table.  And they get to own a share of stock in a company that will become much more valuable.

As much as an Allergan shareholder, you would say, oh, I want the acquirer to overpay for me, when your acquirer is paying in stock, what you want them to do is you want them to overpay for you they day they buy you and thereafter, never overpay for anything again.

And the problem is it doesn’t work that way.  The CEO is prepared to pay for you is a CEO whose stock you do not want to own an interest in.

And I think what Mike is saying, I think what he has demonstrated is that being a disciplined acquirer, offering full and fair value but not overpaying, has enabled him to do 100-odd transactions over six years.

PEARSON:  But and we have walked away from a couple and there have been a couple where we nudged the price a little bit.  But we are not — this will not come down to us paying, upping our premium a significant amount.

RUHLE:  If the answer could not be both, and I would look at Allergan and Valeant right now, which stocks should I buy?

ACKMAN:  You should by Valeant, actually.  Right now Allergan stock is trading a couple percent — I haven’t checked it recently — above the value of the Valeant transaction.  And Valeant, I think, in most — typically in a deal, an arbitrager shorts the stock of the acquiring company and buys the stock of the company that’s being acquired.  That kind of activity can push down the value of the acquiring company’s stock.

What I would do here, interestingly enough, is you might actually buy the stock if you’re an arbitrager of Valeant and short the stock of the acquiring company on the bet that you have got a premium.  They are trading above this price.  The simplest thing to do, though, is just to buy Valeant stock because if you look at Valeant stock today at $135 a share, you’re paying 15 times management guidance for the year.  That to me is a low price for business with high single-digit organic growth rates.  that’s a low price for a company than can do its accretive acquisitions as they can do.

So if the deal never happens, you’re fine.  This Valeant stock was 150 a month or two ago.  Today, it is 135.  So on a stand-alone basis, I think it’s attractive.  If this deal happens, we put together some numbers in our presentation and we think this business looks a lot more like a consumer packaged goods company, certainly the durable part of the business.  If you take the patent drugs and you value them at a 7 PE and you take the rest of the business and you value it at an 18 PE you get some very high valuations before assuming any value would be what we call a platform.  But we think this is easily a $200 stock when this transaction closes.

RUHLE:  I know who’s most important, the shareholder here, and you want to trim the fat at Allergan.

What does that mean for Allergan’s management?

What does this mean?  What is the future for Allergan’s CEO?

He is one who created the fat.

PEARSON:  Well, he inherited the company.  And then the company has been a good performer.  It’s a  well respected company, they have some great products.

I think if we integrate, some senior management might like our model and want to stay and we may want to keep them and some may not.  Clearly, we do not need two CEOs, we do not need two CFOs and we don’t need two head of investor relations.  And we will make those decisions.

SCHATZKER:  Bill, you have drawn inspiration over the course of your career from many different sources, including, at one point, one of our former colleagues here.

Where did the idea for — where did the genesis for this approach originate?

RUHLE:  Because everyone is saying right now —


SCHATZKER:  — innovative, unusual, game-changer, how did you guys come up with the idea?

Bill Ackman:  Well, look, I think Mike and I bring in our respective companies bring — have different competitive advantages.  They have an incredible ability to operate and run businesses in this industry.  They’ve got great discipline the way they allocate capital.  I want to give a shout-out to Value Act (ph).  It’s been a great, I think, leading activist investor on the board for six years.

RUHLE:  Shout out.  Love that.

ACKMAN:  They’ve created an enormous value and that is 25X ago.  So we are coming in 25X up.  But I think from here, I think we can — you know, we’re just applying the same kind of techniques we used.  We quietly build a stake in the company.  And then we work with the management and the board and the shareholders to propose changes that can make a business more valuable.

SCHATZKER:  And the change, in this case —

Bill Ackman:  Here —

SCHATZKER:  — happens to be —

Bill Ackman:  — and  the benefit of the change — we knew how to get it done up front.

I have a very good analogy to this.  In Union (ph) Pacific, we had unfortunately the worst run railroad in North America, stock was $46 a share.  It was — stock was trading at a discount to the group, had half the operating margins to its direct competitor.

We bought 14 percent of the railroad and we had in our pocket Hunter Harrison, who’s the greatest railroad CEO of all time.  And we couldn’t — you know, it’s very similar.  We had to advocate for Hunter to become CEO of the company.  The board initially rejected us.  We ran a proxy contest.  We got 13 directors.  The board elected Hunter as CEO.  It’s taken the stock from $46 a share to $175 yesterday when they announced —

SCHATZKER:  And you’re still holding?

Bill Ackman:  We are still a major shareholder.  We own 10 percent of the company.  It is actually a little bit smaller than our investment but it’s still 23 percent of our capital.  I think that we’re a big investor.  Here we are doing the same thing.  The difference is, instead of just a CEO that was at the time retired, coming out of retirement, we have a whole management team and we have the strategic infrastructure that can create the synergies.

And we are buying 10 percent of the company.  And then we will assist Valeant in getting —


SCHATZKER:  Is it a model, though, for other hedge funds?

Bill Ackman:  Sure.  It’s a model for anyone.  If this is what you do for a living, I think we have some unique attributes, but there are other very talented people in this industry that certainly could do the same thing.

RUHLE:  All right, it is clear you are a long-term investor.  I want to just touch on Herbalife before we leave.

You have said I’m going to take this to the end of the Earth.  This thing’s going to zero.  Things are going in your direction at this point.  Things have finally cracked.

Are you not going to get out of this trade until it goes to zero?

Bill Ackman:  Again, every position in the portfolio it’s risk versus reward, I do not think the stock gradually goes to zero.  I think it is more of an overnight phenomenon.  And what you have right now is you have a criminal investigation, the Department of Justice, the FBI have launched a criminal investigation.  The FTC, after 15 months of our being public about this —

RUHLE:  This 2.5-year overnight phenomenon.

Bill Ackman:  — for the FTC to launch a formal investigation, I do not think it is well known by your viewers.  They have to do a very thorough preliminary investigation.  I think because of the profile and because there’s a short seller, there’s a chance to make money, I think they were even more careful.

For the FTC to go to a formal investigation here, with the vote of the commissioner, what they’re telling the market is that there’s some serious — they certainly see some evidence of serious problems at the company and the FTC’s track record in going after pyramid schemes, is pretty much — they have got about 100 percent batting average.

Other than Amway in the 1970s, the FTC, when they go after an multi-level marketing, an ostensible multi-level marketing company for legal issues, inevitably those businesses are shut down and the evidence here is incredible.

One of the things I find remarkable is that the stock is at $57 or whatever dollars a share.  I mean, to pay $6 billion for a pyramid scheme, to me, that’s overvaluation.

RUHLE:  At this point, I do not think many new people that will fight you.

Bill Ackman and Rahm Emanuel are the two men you just don’t want to go head-to-head with because they never stop.

Bill —

Bill Ackman:  That persistence will pay off here.

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