Breakout

Ackman puts a new twist on activism with Allergan bid

Breakout

Controversial hedge fund manager Bill Ackman has come up with a new way to generate alpha. The man who’s spent the the better part of the last year leading an openly self-interested battle to prove Herbalife (HLF) is a pyramid scheme has combined forces with health care giant Valeant (VRX) to put together a $50b bid for Allergan (AGN).

Were it not for the a overwhelming market penetration of Allergan’s Botox, Ackman’s proposal would be raising eyebrows all over Wall Street and in the financial media. As it is, Ackman’s brilliant merger of activism, corporate raiding, and front-running his own book is sure to be a model for the next wave of hedge fund activism.

Hedge funds now control some $2.7 trillion, a record total and more than twice what they had under management in 2008. As discussed in this space less than a week ago, activist hedge funds are seeing more than their fair share of that booty.

Related: Corporate America beware: Activists are a growing force

The problem for the activist funds was that even those huge collective assets didn’t give them enough firepower to go from being mere irritants to actual threats in the eyes of corporate management. Even at about $15 billion Ackman’s Pershing Square fund was too small to be an outright threat to a $50 billion behemoth like Allergan. Now that he’s joined forces with Valeant Ackman has the financial muscle to get Allergan, or anyone else in corporate America, to pick up their phone on the first ring.

Of course Ackman already had placed his bets before going public with his scheme. According to the NY Times Pershing had bought 4.99% of Allergan in March and April; just under the 5% point at which he would have been required to report his stake.

The Times says Ackman than paused, letting the market level out to its natural price (deemed to be $116). The Times says Ackman bought rights to additional shares yesterday, bringing its total voting power to the equivalent of 9.77% before announcing his joint bid.

Hank Smith of Haverford says we’re going to see more of this kind of activity, and not just because Ackman has managed to create around $700 million in profits out of almost nothing. In the attached clip Smith explains that activists with corporate backing don’t really need to make an argument for better management or improving ROI. They can simply go in firing.

What should investors at home do? Grab their wallets. There is a very high stakes game of poker going on right now. Just because it’s a twist on what Ackman was trying to pull of at Herbalife doesn’t mean the stock price of Allergan is going to be any less volatile for individuals.

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