(Bloomberg Gadfly) -- Bill Ackman's decision to spend more time investing raises an important question for anyone continuing to let him manage their money: What was it that he was doing before?
The reported shift in strategy comes with the news that Pershing Square Capital Management is laying off about 10 people, nearly a fifth of its staff. Assets under management have shrunk as Ackman starts to be better known for his misses -- namely Valeant Pharmaceuticals International Inc. -- than his successes. His most recent fight at Automatic Data Processing Inc. resulted in a defeat and did little to shore up his activist reputation. ADP's CEO called it an "ass-whooping."
Ackman is also grappling with a $290 million settlement related to claims that Pershing Square violated insider-trading rules when it teamed up with Valeant in support of its 2014 bid to buy rival Allergan Plc. Ackman's firm is on the hook for two-thirds of that settlement, and his investors are the ones who will ultimately foot the bill. To help placate them, Ackman and the rest of his management team will spend up to $300 million buying shares of Pershing's publicly traded security. The purchases, in theory, should increase the value of Pershing's shares, but they will also give Ackman and his associates a bigger stake in those gains. That's led some investors to complain that Ackman, even in an effort to make investors whole, is putting his interest above theirs, raising the likelihood that more money will flee the fund.
Ackman's investing style has always been a complicated balancing act. It was never just about picking stocks and watching the gains roll in. While many -- not least of all financial reporters -- will be grateful not to sit through more three-hour sessions with a 160-plus page slide decks, those verbose presentations were very much a part of what made Ackman stand out. His impassioned sales pitches and willingness to go on TV and lambaste companies as being mismanaged gave him something he could point to as an edge. After all, this is the man who reportedly told the CEO of ADP that "I’m only second to Donald Trump in terms of number of clicks on the internet, and hence you will lose if there’s a public relations battle."
The thing is, ADP did engage in a public relations battle, and it won by aggressively attacking Ackman's credibility. Ackman can retreat to a more quiet form of activist investing, as he seems to be suggesting. The question is whether he will remain as much of a force to be reckoned with. Will CEOs be as willing to acquiesce to his demands if they know they'll be spared the barrage of statements and TV appearances that typically marked an Ackman campaign? It's hard to say. Dan Loeb of Third Point LLC seems to have smoothly transitioned from the abrasive letters of his youth to a more understated approach to activism, and management teams at Nestle SA and DowDuPont Inc. still seem to be listening, but Loeb hasn't had the kind of high-profile failures that Ackman has.
The bigger problem for Ackman may be his investors. A big part of his investment kabuki theater was not just bullying companies but proving to his investors loudly that he was doing something to earn his high fees. Index funds have been able to produce far better returns than Ackman over the past five years -- 108 percent for the S&P 500 Index compared with just 1.5 percent for Ackman. And yet those funds can't charge even a fraction of what Ackman gets. Even if this strategy of refocusing on investing bolsters Ackman's returns, he has to convince investors that the improvement is because of him. The latest spat over the Valeant settlement shows that how those gains are split, between him and his investors, is just as important to Ackman.
Ackman may be saying he is going to take a more quiet approach to investing, but when the bluster was the main selling point, that doesn't leave much to get excited about.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Stephen Gandel is a Bloomberg Gadfly columnist covering equity markets. He was previously a deputy digital editor for Fortune and an economics blogger at Time. He has also covered finance and the housing market.
Brooke Sutherland is a Bloomberg Gadfly columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.
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