| Photo credit: Bloomberg |
By Michelle Celarier
ValueAct Capital Management’s Jeffrey Ubben has carefully cultivated a reputation as a good-guy activist who works with management to get results — a reputation that was built in part on his tremendous success with Canadian drugmaker Valeant Pharmaceuticals International. Valeant soared for years, helping fuel such lofty returns for the San Francisco hedge fund that by 2015 it was able to move into an architecturally stunning 30,000-square-foot office that, with its Piet Mondrian-style design and signature Eucalyptus wood, has been called a “cathedral of commerce” in the prestigious Presidio district.Then Valeant crashed, tarnishing ValueAct’s once-golden reputation. The firm has lost more than $3 billion on Valeant since its peak last summer, and some of its other big-name investments are struggling too. Both Twenty-First Century Fox and Baker Hughes, two of its biggest holdings, are trading below the price when the hedge fund firm disclosed its ownership. Then, last week, ValueAct paid a record $11 million to settle a lawsuit by the Federal Trade Commission that claimed it violated premerger notification rules, arguing the firm was trying to influence Baker Hughes and Halliburton’s plans to merge. At the peak, ValueAct had a $2.5 billion investment in the two oil service companies. This year, the firm’s main hedge fund has fallen more than 7 percent through June, putting ValueAct’s firm wide assets at around $16.4 billion. Over the past 12 months though June, the fund fell 18 percent.
Ubben, 54, hasn’t endured quite the same degree of media scrutiny that other big-name activists have, like William Ackman, Daniel Loeb and Carl Icahn. In part, that’s because he’s on the West Coast, away from the eye of the New York media, and also because he shuns the limelight and has disdain for those who seek it. Ubben declined to comment for this article, saying he “doesn’t care” for the media.
To be sure, he has had plenty of winners, notably in his largest holding, Microsoft Corp., which is up about 50 percent since he took a $2 billion stake in 2013 (and has subsequently sold off much of it.) Although Microsoft is basically flat this year, investors say it kept ValueAct’s losses last year at around 2 percent, as Microsoft gained 37 percent in 2015 while Valeant was tanking. Investors are also sanguine about this year’s losses, saying many of ValueAct’s investments have a longer-term horizon to profitability, much like a private equity firm.
Still, ValueAct’s role in Valeant is dragging it down in more ways than one. Ubben won kudos earlier this year for being perhaps the only hedge fund manager to profit on the by-then toxic drug company, having taken $1.5 billion out of Valeant through dividends and a well-timed stock sale last June that trimmed its position to a 4.4 percent stake. ValueAct said the move was done for portfolio balancing and to keep the position below 20 percent of its main fund. Since then, the San Francisco-based hedge fund firm’s remaining 15 million shares in Valeant dwindled to a mere $394,000 at the end of March, a nearly 90 percent drop. (Its entire U.S. stock holdings declined by some 40 percent, to $10 billion, by the end of March from last June.)
During the first quarter, ValueAct execs had two Valeant board seats, which gave the hedge fund firm a role in the drugmaker’s internal probe over questionable practices regarding drug pricing and reimbursement through its Philidor specialty pharmacy. (Philidor was said to be getting insurers to pay for expensive Valeant drugs for patients by, among other controversial tactics, forging doctor prescriptions, according to news reports.)
Nonetheless, ValueAct lost another $1 billion on Valeant. The bloodletting didn’t stop in March either. Valeant has slid another 30 percent since then, closing on Wednesday, June 21 at $24.57 per share, just a few dollars above the average $21.45 ValueAct paid for its stake.
What has gone unnoticed is that ValueAct’s stellar reputation was, at least in part, created by what for many years was a below-the-radar investment in Valeant, which in 2009 amounted to almost 25 percent of the drug company. When the hedge fund sold down its stake last summer, it had a 900 percent gain on Valeant — one of the best-ever in the annals of activist investing.
The drug company’s rise also helped the once-relatively unknown activist raise more capital and plow money into bigger names like Microsoft, Adobe and Twenty-First Century Fox. However, at the end of last year, a much-diminished Valeant was still ValueAct’s second-largest U.S. holding, valued at more than $1.5 billion out of what was then $14.5 billion in U.S. stocks. At the beginning of 2016, ValueAct had $17.6 billion in assets under management, including a $1.7 billion investment in the U.K.’s Rolls Royce, which has gained only 5 percent since ValueAct disclosed its investment in November.
Last year, as Valeant shares neared their peak, the hedge fund had posted a 17 percent annualized return since it launched in 2000, which has since slid to around 15 percent, investors say. Valeant shares alone annualized at 100 percent over nine years between 2006 and mid-2015.
ValueAct’s role in Valeant showcases the downside of its strategy of working closely with management and even calls into question the value of long-term versus short-term holdings, since the fund has been a Valeant investor for about ten years. ValueAct hired former Valeant CEO Michael Pearson, endorsed his M&A strategy of buying drugs and downplaying research and development — a strategy that other hedge funds also found attractive. ValueAct was also on the board while Valeant was raising drug prices and engaged in questionable activities with now shuttered specialty pharmacy Philidor occurred. Philidor’s role was to make sure the drugs sold at exorbitant prices, whatever it took. But ValueAct and the rest of the board knew nothing about the price hikes nor the “shenanigans” surrounding Philidor, says one individual close to the hedge fund.
But perhaps most important, ValueAct partner Mason Morfit, who headed Valeant’s compensation committee, set up the stock-based pay scheme for Pearson that the company’s board, under prodding from investor Ackman when he finally joined this year, admitted was too aggressive and may have pushed the company into unsavory practices. Led by Ackman, the board fired Pearson in March.
Now ValueAct is in a bind. It still has one executive on Valeant’s board, giving it too much inside information in the midst of multiple investigations to sell out its remaining stake. Having created Valeant, ValueAct’s reputation may ultimately hinge on whether or not it can help save it. No word on whether the cathedral of commerce has a prayer chapel.
