Hedge Fund Hoedown: I Am Not My Holdings

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Hold my beer, watch this guys.

Bill Ackman is getting chewed alive by the media thanks to Valeant Pharmaceuticals. The stock is down over 80% since he went activist last year — he even saw $1 billion go up in smoke on Tuesday – but hey, it’s not really a loss unless you sell. Things have gotten so bad for Ackman thanks to the fact that nearly every stock he owns is down on the year, he’s now dumped a chunk of Mondelez to help right-size the portfolio.

There are plenty of other funds that are being taken to the woodshed with Valeant, but Ackman’s own hubris and slight arrogance has opened him up to public shaming. Publicity is a net-negative for the Ackman posse, especially compared to Jeff Ubben at ValueAct Capital or Robert Goldfarb and David Popp at Sequoia — who own more Valeant shares than Ackman. Is it fair? Probably not, but the media knows no fairness, driven only by clicks. But even Matt Levine is having regrets about joining in on the curb stomping of Ackman.

Now, I know, Ackman has is known to blow up hedge funds, but this time is a bit different. Rest assured, Ackman is not getting any margin calls or mass redemptions. He notes that just 2% of assets were redeemed at the last redemption mark — Feb. 15.

I am, however, interested in the second step for Ackman at Valeant. The obvious choice is to start breaking this bad boy up. Ackman notes that Valeant is “a problem, but we know what to do.” I think that likely involves showing Mike Pearson the door — there was no real reason for Mike to even come back from medical leave. He should’ve slipped into the abyss. Mike is suited to build things up. These times call for a CEO that can break things down.

Dubbed the “new Lehman Brothers,” Valeant fits all the holes — accounting issues, weak board and poor governance, saddled with debt, unsustainable business model, dodgy management — the money making model of buying drugs and jacking up prices is over. Without that, what is Valeant? More importantly, after Ackman and Ubben’s involvement with Valeant, why should anyone listen to what they say?

To that, I say Ubben is still in the black and was involved with Valeant long before many of these journalists were out of diapers. Ackman, on the other hand, has got caught with his ego hanging out. He needs to work fast to get a replacement for Mike and start junking the pharma company.

Let’s just hope that Ackman takes a page from David Einhorn when it’s time to reflect on 2016. Einhorn was full of humility in his 2015 investor letter after his Greenlight Capital posted a 20% loss for the year. Quoting David Bowie, Einhorn wrote, “I don’t know where I’m going from here, but I promise it won’t be boring.” Greenlight Capital has been one of the few bright spots among hedge funds in 2016, up 3.3% through February.

Take it down a notch.

Activists, in general, are getting taken to task of late, however, it’s still early. Activism exploded over the last few years and now there’s a lot of money chasing fewer targets. The strong will survive and thrive, however, we do need a bit of a washout — some of which has already taken place with Orange Capital and LionEye Capital shutting down.

More importantly, no matter how activist investors do going forward, they have forever changed the game. Conventional activists have empowered the passive investors and brought about “reluctavists,” which are normally passive investors, but are taking an activist approach to flip poor corporate on its head. Half the activist campaigns in 2015 were launched by reluctavists.

On the other end of the spectrum, we have companies caving to activists too easily. That needs to change. Granted, this avoids a costly proxy fight, I’ll be the first to admit that activists are not always right. However, they’ve managed to convince major fund managers like Fidelity and T. Rowe that they are, giving them even more firepower. Like all major changes, we tend to overshoot. The major funds will eventually start thinking for themselves again.

Pencil for your thoughts.

How is Office Depot still around? Rhetorical, obviously, but even the ‘saving grace’ for the company, its commercial office supply business, has to be drying up. Making money from selling pads and pencils is a dying business, it’s that simple.

But just as Amazon is getting into the physical bookstore space, a move into another dying industry only makes sense for them — after all, Bezos loves losing money. So, with that, Amazon is looking at buying the corporate business of Office Depot. The buildout of its delivery network, with trucks and planes, would make delivering office goods that much easier.

Office Depot is a name that has been good, and bad, to activist investor Starboard Value. The hedge fund forced an OfficeMax and Office Depot merger, which was great, for a time. However, the spread of Amazon soon negated any synergies. So Starboard’s mission of late is to get Staples to buy Office Depot — a move that has faced a number of regulatory hurdles and FTC pushbacks.

The whole reason for the merger is Amazon. However, the grand plan is to get Amazon to buy the corporate biz and then the FTC will let the merger with Staples go through. I will say, it will take a ‘huge’ move like this to get the FTC to go along with the deal — so Jeff Smith at Starboard better be building his position in Amazon.

Carmer, give me a break.

United Airlines is getting pressure from two ‘activist’ investors, although both PAR Capital and Altimeter Capital are both far from conventional activists. The two joined forces and announced a proxy battle to get six of the 15 board seats — making the announcement just days after CEO Oscar Munoz returned from a heart transplant.

Of course, Jim Cramer chose to opine, “Right or wrong, these activists could have waited a couple of weeks. Whatever you think about the way United Continental is run, I think this is a new low for activist investing.”

PAR and United were involved with United before announcing the proxy battle and had been communicating with Oscar while he was on leave. And with his brand new heart, I’m sure Munoz can handle the pressure. After all, United purposefully delayed the announcement of the heart attack — so they’re not worth entirely defending. Either way, the absolute debauchery of the United and Continental merger that’s been taking place for over half a decade should be the real topic of conversation.

Letters to Santa.

Sessa Capital bashes Ashford Hospitality again. Cevian is still pushing for a breakup of ABB, now hiring Boston Consulting Group to consult on such a breakup. CBS exploring strategic alternatives for its radio unit.

Thoughts welcomed. Fill out the 3-question survey here. Enter your email to win my advanced copy of Dear Chairman by Jeff Gramm – I’ll even sign it – ha. As I step away from the day to day and intricacies and turn the data sourcing and analytics over to those that are more suited for that role I’ve got more time for bigger thinking and connecting the dots. Along those lines, I’d love to hear what you want to see more of.

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