Defeat at J.C. Penney Hurts Ackman as Performance Trails

As Bill Ackman, the largest shareholder of J.C. Penney Co. (JCP), agreed to leave the company's board, the retailer's managers weren't the only ones breathing a sigh of relief.

Investors viewing the departure as good news were pushing the shares 3.2 percent higher at the start of trading yesterday. For an activist like Ackman, whose involvement in a company's management is meant to boost the share price, it was a bad ending to a disastrous investment. After two-and-a-half years on the board and potential losses of more than $700 million, he had declared defeat and the market had applauded.

It's been a tough year for Ackman. His $11.2 billion Pershing Square Capital Management LP is trailing many of its biggest rivals this year with a 3.7 percent return through July in his largest fund. In addition to J.C. Penney, he's lost about $320 million on a bet against Herbalife Ltd. (HLF), a weight-loss and nutritional supplement company. Carl Icahn and George Soros's family office have taken the other side of the bet, helping the shares double in value this year. The defeats weigh on Ackman as he seeks to rally shareholder support for his latest target, Air Products & Chemicals Inc.

"Being an activist investor is all about reputation, and such high-profile losses as J.C. Penney and Herbalife may hinder him when he tries to throw his weight around at Air Products and other companies," said Brad Alford, head of Atlanta-based Alpha Capital Management LLC, which runs two mutual funds that invest in hedge-fund strategies. "His recent batting average would send him to the minors."

Getting Blame

Since joining the board of J.C. Penney in February 2011, Ackman had been the architect of a major shift in strategy. He pushed to replace Mike Ullman as chief executive officer, and hired Ron Johnson, the executive who helped build Apple Inc.'s retail stores. Johnson ended discounting and remade the stores into collections of boutiques. The strategy flopped with customers, resulting in a $985 million loss for the year ended in February as sales plunged 25 percent to the lowest level since at least 1987. Johnson was ousted in April and replaced by Ullman.

Ackman, in an interview yesterday with Charlie Rose, said he got "too much credit" for helping to recruit Johnson.

"It was really the collective decision of the board to bring him on," Ackman said. "And when the business failed, I probably got too much of the blame over the trouble we've had in the last year for recruiting Ron. That's the risk of my business."

Soros Backing

Ackman drew the board's anger last week by making a letter to his fellow directors public. In the missive, Ackman told the board members that he had persuaded former J.C. Penney CEO Allen Questrom to agree to return as chairman if he approved of the next CEO. The 73-year-old Questrom, in an interview last week, said returning as chairman was "a long shot" that hinged on directors forming "a positive board and an aggressive board to help solve the problems" and a new CEO with retail experience being hired.

At least two investors, Soros Fund Management LLC and Glenview Capital Management LLC, supported the current executives, according to people familiar with the situation.

After gaining as much as 3.2 percent, J.C. Penney shares ended yesterday down 3.7 percent, in part on concern that Ackman will sell his almost 18 percent stake in the company, said Michael Binetti, an analyst at UBS AG in New York.

Pershing's potential sale "is likely to remain a significant stock overhang in the near term," he wrote in an e-mailed research report.

General Growth

Ackman's career has been dotted with both high-profile wins and jaw-dropping losses. He raised a $2 billion fund to invest in retailer Target Corp. (TGT) in 2007, and then lost 90 percent of the money in the next two years. At the time he called it "one of the greatest disappointments" of his career.

Among his wins, Ackman helped rescue General Growth Properties Inc. (GGP), the second-largest U.S. mall owner, from near-collapse by pushing it to file for bankruptcy, which it did in 2009, when he also won a board seat. The salvage effort "turned $60 million into $1.6 billion," Ackman told Bloomberg News in 2011, and contributed to his flagship fund's net return of 29 percent in 2010.

He staged a boardroom coup at Canadian Pacific Railway Ltd. in 2012 after which the stock almost tripled.

Pershing Square has climbed about 20 percent a year since its founding in January 2004, compared with a 6.6 percent return on the Standard & Poor's 500 Index.

Trailing Loeb

Even with Canadian Pacific win in his portfolio, his returns have lagged behind rivals including Dan Loeb's Third Point, which has climbed 16 percent this year through the end of July and Nelson Peltz's Trian Partners Ltd., which has jumped 25 percent through July 26. Richard Perry's Perry Partners International Inc., which recently bought shares in J.C. Penney, is up 11 percent through July 26th.

Pershing Square in July raised a single-stock fund to invest alongside his main fund in Allentown, Pennsylvania-based Air Products. He bought a $2 billion stake in the company, which instituted a shareholder-rights plan to prevent any one investor from gaining too much control right before Ackman made his wager public on July 31.

Ackman has yet to outline any changes he wants made at the company, whose shares are down 1.6 percent since the day before he disclosed the stake.

Ackman's recent sluggish performance has hurt him with investors. As of May, he was about $500 million short of the $3 billion he wants to raise for a publicly traded fund that he wants to list on the London Stock Exchange. He's now expecting to list the fund next year, two years behind his original plan.

Soros Pulls

At least one large investor has pulled money over Pershing Square's performance. Soros Fund Management, the family office of billionaire Soros, asked to pull about $250 million from Pershing last year. Because Ackman's firm only gives back a portion of investor cash each quarter, Soros won't get all its money back until next year.

Some senior analysts have departed. Scott Ferguson, who had been at Pershing since 2003, left last year to found New York-based Sachem Head Capital Management LP. Mick McGuire quit in 2009 to found Marcato Capital Management LLC in San Francisco. He had worked with Ackman since 2005.

Perhaps the biggest embarrassment to Ackman this year has been the very public fight over Herbalife, which he said was operating like a pyramid scheme. In December, he shorted 20 million shares of the company, valued at about $1 billion, announcing his wager in a three-hour presentation at the Sohn Investment Conference in New York. In an interview on Bloomberg Television, he called it "the highest conviction I have ever had about any investment I have ever made, full stop."

Herbalife has repeatedly denied the accusations made by Ackman.

Icahn Feud

Since that pronouncement, investors including Icahn and Soros's family office have bought up the shares. Loeb, who purchased shares and eventually sold them, said the stock could climb to near $70. In a statement on Jan. 25, Icahn said that Ackman was taking "inordinate risks" with a bet that could become the "mother of all short squeezes."

A trader who borrows and then sells stock in anticipation of a decline can incur hefty losses if others start buying the same shares in unison, pushing the price up in a so-called short squeeze.

First Fund

For Ackman, who started his first hedge fund at the age of 26, three months out of Harvard Business School in Boston, his fight over Herbalife and J.C. Penney isn't so unusual. His investing strategy marries intense research with a high level of showmanship. He flipped burgers for half a day at a McDonald's in Florida when he was trying to get the company to sell more of its restaurants to franchisees, and outlined his Target plans by showing 163 PowerPoint slides at a press conference.

From his youth growing up in Chappaqua, a New York City suburb, Ackman has been sure of himself. He once recalled for an audience at a conference that his father, Lawrence, a real estate investor, told him he could do anything, and that he believed it.

He started his first hedge fund with Harvard classmate David Berkowitz and raised $3 million, even though neither had any professional experience. Their clients included the billionaire Ziff family, former owners of Ziff-Davis Publishing Co., and Martin Peretz, editor-in-chief of the New Republic and Ackman's former Social Studies professor at Harvard, where he also got an undergraduate degree.

'Brick Wall'

When Berkowitz and Ackman started Gotham Partners Management Co. in September 1992, they leased a windowless Park Avenue office from brokerage firm Furman Selz Financial Services Ltd. In the first five years the firm posted returns of about 40 percent a year, and assets peaked at $580 million.

Ackman expanded the breadth of the fund's investments in 1997 into private equity. Gotham was forced to liquidate its holdings in 2003 after it received substantial redemption requests following a failed merger between two of the firm's investments.

"Ackman's ego disallows him from recognizing, much less respecting or fearing, all the deleterious outcomes outside the winning one on which he obsesses," said Robert Chapman, the founder of Chapman Capital LLC in Manhattan Beach, California and a holder of Herbalife shares. "Tunnel vision on Wall Street usually has a brick wall at the other end."

Ackman told Charlie Rose that 23 of his 26 active investments are best described as home runs and whether he's a good investor or not is fairly easy to ascertain.

"Ultimately, investors are only as good as their track records," he said.