It is a grey, blustery New York morning, days before Hurricane Sandy will unleash its fury on the city, and Bill Ackman is tearing his way through a day that started just after dawn.
He is running on just a few hours of sleep, his private jet having returned him home the night before after a whirlwind four-day trip through Korea and Singapore. His first stop was dropping the youngest of his three daughters at a small, private grade school on Manhattan's Upper East Side. By 8 o'clock, he is sitting next to me at Sarabeth's, a popular eatery on Madison Avenue, inspecting an egg-white and spinach omelette.
Dressed in a close-fitting navy blue suit, he leans over the table, head bowed, as he fires off pointed responses to my questions—sometimes even before I've finished asking them.
Here on the Upper East Side, Ackman is just another silver-haired billionaire eating a $20 breakfast. In Canada, however, he is the boardroom barbarian who toppled four-star corporate generals at one of the country's most historic companies. It has been 20 years since the 46-year-old Ackman launched his first hedge fund and began building a reputation as the most active activist on Wall Street, betting against overhyped companies and arm-twisting directors into fixing broken businesses. He has had some flops, but today he waves them off. He can afford to. His hedge fund, Pershing Square Capital Management, now ranks as one of the world's biggest and most feared activist forces, with $11-billion in assets under administration. (All currency in U.S. dollars unless otherwise noted.)
Pershing is the corporate personification of the restless, sharp-tongued investor who has such a long history of rubbing people the wrong way that a fellow student once contributed this quip for his high school yearbook caption: "A closed mouth gathers no foot." The bigger the fund gets, the more financial clout and confidence Ackman has to lead shareholder insurrections against powerful boards used to closing ranks on impertinent investors.
"I have always had this drive," Ackman says. "I want to have a significant life. I want to make a difference."
On the home front, that means hosting occasional singles' nights with his wife, Karen, at their sprawling co-op overlooking Central Park to introduce friends to potential mates. "I love matchmaking," he says.
In the business realm, Ackman's reputation rests on boardroom bust-ups, a reputation that was cemented this spring, after he launched what at the time was his biggest activist bet yet, against the oldest of the old guard, Canadian Pacific Railway. The railway's profitability had lagged behind its peers for years, yet the board appeared unwilling to acknowledge shareholders' frustration. What began in November, 2011, as a campaign for a new CEO and two seats on the CP board mushroomed into a proxy war that eventually saw close to 90 per cent of shareholder votes supporting Ackman's dissident slate.
The boardroom massacre that ensued sent a chilling signal to big-business boards: Perform or else. Directors, anxious to avoid the fate of CP's ousted crew, are more motivated than ever before to challenge executives' poor results. Pension and investment funds that have historically shrunk from confrontation have greater leverage to push for change. Since Ackman took aim at CP—triggering a 49 per cent increase in the railway's stock price in one year—it's a good bet that most of Canada's fund managers have his phone number on speed-dial. In short, no other CEO has had a bigger impact on how our publicly traded companies are steered than Ackman.
And Pershing's influence will continue to grow, he insists, because boards in both Canada and the United States are "still somewhat dysfunctional," he says. Too collegial, directors don't push hard enough to get the right information out of executives—who, by the way, can be very selective about what they share.
After several glasses of water and half his omelette, Ackman heads out the door in search of a cab. (He must be the only billionaire in New York with no driver—he doesn't want his daughters to be overly coddled.) On the 35-block ride from Sarabeth's to Pershing's midtown office, Ackman keeps his eye trained on my notebook, exhorting: "It's important to get this right."
First: Pershing has delivered more than a 20 per cent annual compound rate of return to investors in the past nine years. About 90 per cent of the profits, he goes on, were generated by activist plays that pushed targets such as Wendy's International to spin off divisions. Ackman wants to grow the activist side of the fund's business, but he is constrained. Like other hedge funds, Pershing has to keep a large share of its assets in liquid investments because its investors can cash in as much as one-eighth of their holdings each quarter. He wants a more permanent capital base so that he has the freedom to hold on to core stocks like CP as long as "forever," and to make even bigger wagers on activist plays. That's why he was in Asia—courting investors for a new Pershing fund that is planning an initial public offering on the London Stock Exchange. With the new fund and more permanent equity investors, he tells me as our taxi hurtles down Fifth Avenue, "We will be able to do more."
"More" isn't about adding to his considerable net worth—he has made more than enough money, thanks. He and Karen, a former landscape architect, have promised to give away at least half their wealth as part of the Giving Pledge, an initiative started by Warren Buffett and Bill and Melinda Gates. No, Ackman gets his biggest kick from blowing the whistle on offside corporate officials who are damaging businesses or shareholder values. "In corporate America, if you are a whistle-blower, you are probably going to lose your job," fumes Ackman. "A lot of forces come into play where the little guy can get smashed.
"I can do what I think is right. I am not worried about losing my job. I am not worried about feeding my family. I am very fortunate to do what I believe."
* * *
Pershing Square occupies a surprisingly small footprint in a steel and glass tower facing Carnegie Hall. In the wake of Sandy, the building would be shut down for nearly a week because of a splintered high-rise construction crane looming nearby. It would also force us to relocate a planned photo shoot with Ackman—already a source of stress for the camera-shy exec. ("He hates having his photo taken," says assistant Joelle Dellis. "I have a collection of little stuffed toys that I wave at him so he can relax for the photographer.")
But on this day, Sandy is still lashing the Caribbean, and it is business as usual at Pershing, where the firm's 51 employees—putting the assets under administration at over $200-million per staffer—are practised in the art of chasing after their boss.
As Ackman moves from the lobby into a large room divided by pods of desks and a few glass-walled offices, a young man sprints into Ackman's office with a thick printout of the PowerPoint presentation he is scheduled to make later that morning at Goldman Sachs. On his desk—where, sometime during his brief trip to Asia, his six-year-old has left a note saying, "I love you Daddy"—are stacks of messages, documents and investment reports. One of the notes highlights that morning's announcement from CP of its first quarterly results under the administration of Ackman's hand-picked CEO, Hunter Harrison.
Ackman is running late for a 10 o'clock meeting with his father, Larry, who sits in an office two doors down from Bill's corner perch. He's waiting to discuss family business with a son he describes as "busier than a one-armed paper hanger."
Ackman sticks his head into the room to crow about the CP results. In early-morning trading on the TSX, the railway's stock is cresting above $92 a share, a gain of more than $4.
"Not bad," he says breaking into a big grin.
"What about our meeting?" his father blurts as Ackman retreats.
"Sorry, not this morning."
"Can you believe it?" Larry says, raising his hands to the ceiling. "I had a 10-minute appointment. Ten minutes, he can't do with me."
To be fair, Ackman is juggling a staggering array of charity and family obligations on top of his latest—and biggest ever—play. Two months after his Canadian conquest, Ackman acquired a $2-billion stake in consumer products giant Procter & Gamble Co., which, like the railway, has disappointed shareholders with a limp stock price. More recently, he unleashed a series of barbed public attacks against Toronto-based conglomerate Brookfield Asset Management, in an effort to force the sale of a Chicago shopping mall company in which Brookfield and Pershing Square are both investors.
Ackman appears to have made more noise than progress with his latest plays, prompting one Wall Street wag to mutter, "He has gotten ahead of his skis." The shareholder activist bristles at the criticism. He declines to talk about Brookfield, but says he has "an excellent working relationship with the board" of P&G. And he doubts he'll ever again have to pressure a board by launching a proxy battle.
After CP, he says with a grin, "What board is going to say no and face a complete rout?"
* * *
Ackman has never lacked confidence. He grew up in the leafy New York suburb of Chappaqua, where his parents placed a priority on raising their kids to be competitive and self-assured. "We thought the best way to do this was to ensure they were good at a sport," says Larry Ackman, 73. The chosen pursuit was tennis; Bill and his older sister, Jeanne, began training with a personal coach when Bill turned 10.
The strategy worked. By high school, Jeanne (now a radiologist) was a state and county champ, and Bill had secured a county title. On the court, young Bill developed one of the traits that would help in his activist career: persistence. "He had tremendous drive," says his dad. "He hated losing. He would get very angry with himself when he made mistakes." Bill also developed a talent for catching his opponents off guard. "He was always hitting the ball where nobody expected it, and he didn't telegraph where it was going," remembers Larry.
Another priority in the Ackman household was financial independence. Although he ran a successful commercial real estate finance brokerage business, Larry Ackman never wanted his children to take money for granted. That meant no allowances for the kids. Bill dug ditches, shovelled driveways and waxed cars. "My dad thought I wouldn't understand the value of money unless I earned it myself," he says.
By the time Bill Ackman followed in his father's footsteps at Harvard, athletic competition and business ambition were one and the same: When Bill rowed crew on the Harvard Business School team, they had dollar signs painted on their oars.
After graduating from Harvard with an MBA in 1992, and after short stints working for his dad and at a couple other places, Ackman knew two things: He did not want to work for the family business, and he did not want to report to anyone else. He wasn't cut out to take orders, and he detested seeing superiors take credit for his work. What he did like was the stock market. In his spare time at Harvard, he had displayed a flair for investing, betting on blue-chip bank stocks excessively punished by real estate loan-loss fears.
Realizing "investing was what I loved," Ackman staked his future on an investment model just then sweeping Wall Street: hedge funds. In its simplest form, a hedge fund matches professional investors with wealthy individuals or institutions. The wealthy pour cash into a private fund, and investment managers make bets on stocks, bonds, currencies and commodities, typically earning a 20 per cent cut of profits. By 1998, hedge fund managers were taking home such enormous paycheques that Fortune magazine observed, "Almost anyone with a brain is fleeing Wall Street to start a hedge fund."
Ackman carved out his own niche by chance. One year after he and fellow Harvard grad David Berkowitz founded Gotham Partners in 1992, he acquired a minority stake in a public company whose core asset was a $1.3-billion mortgage on New York's iconic Rockefeller Center. Ackman hoped to parlay the investment into a small stake in the landmark property. Instead, he emerged as the champion of the struggling mortgage lender's shareholders, who were fending off lowball takeover offers. To spark a richer bid, Ackman "visited a lot of billionaires" to enlist their support. The result was a two-year odyssey of counteroffers and bankruptcy proceedings that concluded with a winning offer from a syndicate led by Goldman Sachs that more than doubled the takeover offer for the lender. By the time the restructuring was finished, Gotham Partners had earned more than a 60 per cent profit on its initial investment, and Ackman was hooked on fixing broken companies. "You can create a lot of value if you step in and affect the outcome," he says. "It is consistent with my personality. I was never a passive person. I don't like things happening to me that are outside of my control."
* * *
It was November, 2011, when Ackman first met with CP's CEO, Fred Green, and chairman John Cleghorn, during a stopover at Montreal's airport. When he left the meeting, Ackman was convinced the pair would bow to his demand for two seats on the railway's board and to replace Green with Hunter Harrison, the former chief of CP's archenemy, Canadian National Railway.
Indeed, according to Ackman's account, Cleghorn appeared so eager to accommodate the activist that he waved down Ackman's jet as it was readying for takeoff to suggest that Green was willing to step down.
Cleghorn denies he made any such suggestions, one of several "communication issues" Ackman says poisoned talks with the railway's board and led to the proxy showdown—just the third one Ackman has faced since launching Pershing in 2003, out of 24 companies targeted. The first, with U.S. payroll giant Ceridian Corp., he won, taking four seats on the board. Then, in 2009, he attempted to elect a dissident slate to the board of U.S. retailer Target Corp. After being voted down by shareholders, Ackman—who seldom preps for a presentation—shed tears as he delivered a rambling speech channelling JFK's inaugural address against tyranny: "We will pay any price, bear any burden, meet any hardship."
Three years later, the Target pratfall has been reduced to a rounding error; Pershing, Ackman says, has recovered most of its drastic paper losses on a complex investment that included stock options. As for his emotional performance, he dismisses it as a delayed reaction to his gruelling seven-year fight against MBIA Inc., a play that eventually earned him a $150-million profit (which he later donated to a family foundation) and a part in the Oscar-winning documentary about the financial meltdown, Inside Job.
The bet that stings the most, however, was his ill-fated run at the now-defunct U.S. book chain Borders, which didn't result in a proxy contest, but cost Pershing an estimated $200-million after a failed merger attempt forced the chain to declare bankruptcy. "We went down with the ship," Ackman says. Although the loss was the worst in Pershing's history, Ackman prizes the lesson he learned: "If you are in a tough business with a weak management," he says, "you're finished."
For Ackman, that rule applies to investments and to politics, which explains why, during our last interview, on the night of the U.S. election, the avowed Democrat revealed he had voted for Republican candidate Mitt Romney. His rationale: "I voted for Romney because if we don't save the economy, we are not going to save the country. I think Obama has lost the confidence of the business community. He is like Fred Green—he has had four years, and he hasn't made a lot of progress."
* * *
CP's entrenched directors, however, refused to dump their man—even though he operated one of the most inefficient railways in North America. "It seemed so obvious to us that the right thing to do was to replace Fred Green with Hunter Harrison," says Ackman. "It was disappointing to us that we were not successful convincing the board."
CP's directors dismissed Harrison as a "detrimental" leadership candidate, yet offered no alternative management or strategic changes to fix CP's bloated operating costs, which equalled 81.3 per cent of its revenue in 2011, compared to industry-leading CN's operating ratio of 63.5 per cent. Just before Pershing began buying up an eventual 12 per cent stake in CP, its stock price had dropped to a two-year low of $44.92 on the TSX.
At times, the CP board seemed driven into angry confusion by Ackman's battle strategy. In January, two months after their encounter at the Montreal airport, Ackman fired off an e-mail to Cleghorn warning of a "nuclear winter" if the board did not heel to his demand for a new railway chief. The lengthy message was so stinging that even Pershing's advisers privately refer to it as the "tear gas" e-mail.
In April, Ackman again infuriated directors by questioning the integrity of the railway's financial reporting—during a televised interview on BNN. The insult was "outrageous," fumed Cleghorn in a release. "We demand that you publicly retract your untrue accusations and offer your apology to the company, our shareholders, our board of directors, our audit committee, and the dedicated employees whose integrity you called into question." Ackman did neither.
Ackman's most vitriolic outburst occurred after his proxy vote triumph at CP's annual meeting in Calgary this past May. Minutes after his overwhelming victory—which saw Cleghorn, Green and four other directors resign—Ackman walked into a meeting room at the Sheraton Hotel. Waiting at the table were his chosen directors, plus most of the board's remaining old guard, including retired Suncor chief Rick George, U.S. rail veteran Tony Ingram, and Madeleine Paquin, head of Montreal cargo operator Logistec Corp.
Ackman was proposing that two members of his slate—former head of the Alberta Treasury Branches Paul Haggis and U.S. railway veteran Stephen Tobias—be named chairman and interim CEO, respectively. Instead of bowed heads and a trembling white flag, Ackman faced a counteroffensive. Staring down the activist, the directors proposed installing Ingram as chairman, and chief financial officer Kathryn McQuade as interim CEO.
Ackman's furious outburst could be heard in an outside hallway, where a clutch of advisers was standing by. According to people familiar with the session, Ackman challenged Ingram's credentials, accusing the directors of attempting to thwart his long-term plan to name Harrison CEO. "I think you missed what just took place at the shareholders' meeting," Ackman yelled. "We will go right back outside and we will run another proxy contest to replace the balance of the directors."
After a recess, the startled stalwarts agreed to a compromise: Tobias was named interim CEO and Paquin, acting chair. Within months, George and Ingram had resigned from the board, Harrison was anointed CEO, and Haggis became chairman.
Half a year later, Ackman is asked to explain his Calgary outburst. "Ballistic is too strong a word," he says. He searches long and hard for diplomatic words to explain his passionate reaction in the CP boardroom. "There were a lot of bruised feelings," he says. "It took a while before we were able to work it out. The first few hours were not easy."
When it is suggested that his anger may be a deliberate act to unnerve his adversaries, he is incensed. "I don't act, ever," he says. "I'm exactly who I appear to be. I am unfiltered, for better or worse."