March 12, 2013
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In addition to commenting on his high-profile current investments, Pershing Square Capital’s Bill Ackman in a recent interview with Value Investor Insight describes the general company traits he looks for in both active and passive investments, why a high public profile is an important element of his strategy, whether his thesis on J.C. Penney has evolved, what lessons he’s learned from a few prominent mistakes, and why his short conviction on Herbalife is as high as ever.
Starting at a basic level, how would you characterize your investing strategy?
We rely on concentrated research to identify great businesses that are trading at highly discounted valuations because investors have overreacted to negative macro or company-specific events. That’s the time-arbitrage part of the strategy, taking advantage when the market reacts to short-term factors that have little impact on long-term intrinsic values. Our greatest competitive advantage, though, comes from using our stake in a company to intervene in the decision-making, strategy, management or structure of the business. We don’t like waiting for the market to be a catalyst.
Why is Warren Buffett willing to pay 20% above the highest price at which H.J. Heinz stock has ever traded, even after it’s had 20 quarters of great results? The answer is that control is very valuable. Not just for the bragging rights, but because you can change strategy, you can redo the cost structure, you can change the tax structure, you can sell off underperforming assets or hidden assets. The control premium is really telling you that the current management team and board are not optimizing the value of the business. For a financial buyer, which is essentially what Buffett is in this case, you’re buying it be- cause it’s a great business and because you believe you can make the price paid end up looking cheap.
That’s very similar to what we try to do: Buy high-quality businesses at a price that is not reflective of the intrinsic value of the business as it is, and certainly not reflective of what the intrinsic value would be if it were run better. That allows us to capture a double discount. That’s a benefit we can have over private equity. They can buy a company and run it better to extract incremental value, but they’re typically paying the highest price in a competitive auction, so they don’t get that first discount. We don’t get full control, but because we have a track record of making money for other investors, we can often exert enough control to make an impact. With Canadian Pacific Railway [CP], we won a proxy contest and with our 14% stake were able to appoint 8 of the 14 directors and recruited one of the best rail- road executives of all time, Hunter Harrison, to be CEO. That has created a lot of value.
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