Bill Ackman is in the news these days for all the wrong reasons. He resigned from the board of JC Penney this week after other board members got sick and tired of his medalling. He’s involved in a spat with his hedgie rival Carl Icahn over whether Herbalife is a Ponzi scheme and George Soros seems to bet against him no matter what he does. Is this the death of the activist investor?
While Ackman is not the only person to question the business model backing Herbalife, it is his actions regarding JC Penney that are gathering most attention, or should I say scrutiny. He deposed the CEO, replacing him with an executive that he poached from Apple. However, tech and old-school department stores work very differently and the new CEO basically fell on his a**. He was chucked out, the old CEO was reinstated, Ackman kept publically criticising the new-old guy to the point where the rest of the board staged a coup, which ultimately led to Ackman’s resignation.
I should mention that Ackman was able to install his own CEO in the first place because he owns nearly 20% of the company and also had a very influential seat on the board. Now he has no seat on the board, yet he still owns a stake in the company, how the mighty have fallen…
Below are four lessons from Ackman’s experience that any antsy hedge fund managers out there should heed:
1, Don’t get out of your depth: how on earth did Ackman think that he knew who should run a department store? Also, why did he think that Apple’s success could be replicated? Apple is the type of company that only comes along once in a generation and was mostly brilliant because of Steve Jobs. Also, Apple essentially makes similar things: hardware and software that mostly do the same thing. Department stores, in contrast, have to sell everything from towels to underwear and barbeques.
2, Don’t go public: that really annoys everyone else on the board and makes you look like an egomaniac. Sometimes, when you really are at your wits end, then what’s an investor to do? But for Ackman he just looks like he is desperate to see himself, or hear his voice, on camera. Fighting two battles in front of the camera is a definite no-no.
3, Take a leaf our of Warren Buffett’s book: He is the world’s most legendary investor and you never hear him say one angry word about anyone. If Buffett doesn’t like what he sees at a company and if he can’t change it then he sells up and gets out. He is considered a gentleman, and people respect him for that. Some old-fashioned manners go a long way.
4, Take a leaf out of Warren Buffett’s book #2: Buffett is extremely modest, which is another reason why people like, trust and respect him. He is the first person to say that he won’t invest in something he doesn’t understand. It looks like Ackman did not understand, or at least miss-judged, JC Penney, which is why this saga ended so badly for him.
Activist investors are a good thing. They can reign in risky practices, limit excessive wages and bonuses for executives and help get value for shareholders. However, there is a major problem when the activist investor becomes the risk. JC Penney bucked the overall stock market rally and is down nearly 40% year to date, however, since Ackman resigned from the board, the share price has staged a mini recovery. The market has spoken, and it doesn’t like Ackman’s style.