Bill Ackman: 'A stake in the ground'

In Bill Ackman's world everything is negotiable, even the prix fixe menu at the Red Eye Grill in midtown Manhattan.

Scanning the daily specials, the billionaire hedge fund operator begins bargaining. He wants miso matzo ball soup instead of salad. He'll take the yellow-fin tuna burger, but lose the bun. And instead of hand-cut fries, sautéed spinach.

"I can do salad on this menu sir, but I don't think I can do spinach," the waiter winces.

Feigning outrage, Mr. Ackman points to me, gasping, "You're giving her sautéed spinach, I want sautéed spinach."

The waiter nods, retreating to the kitchen. You hope he's got the message. Powerful business leaders and regulators have learned to regret not yielding to the shareholder activist and his New York hedge fund Pershing Square Capital Management.

"I negotiate, that's what I do," the 46-year-old says with an impish grin that seems out of place underneath a shock of thick white hair. "If I believe that I am right, I will take it to the end of the earth until I am proven right."

Mr. Ackman's legendary persistence is expected to deliver a boardroom coup that until recently would have been unthinkable in Canada. After four months of 24/7 campaigning for management and boardroom changes at Canadian Pacific Railway Ltd., Mr. Ackman is expected to win a proxy battle on May 17 that will likely see some of Canada's most influential corporate directors replaced by a slate of seven low-profile consultants, entrepreneurs and retired businessmen.

The anticipated upset is in part a testament to Mr. Ackman's ferocious crusading, which a friend once likened to stepping inside a wind tunnel, and his no-holds-barred campaign tactics. His expected victory also highlights the growing clout of activist funds which are deploying billions of dollars and ties with other investors to shake up underperforming companies.

For Mr. Ackman, the anticipated win will be powerful leverage the next time he makes a major investment in an underperforming company and asks for board or other changes. Pershing has targeted 23 companies in nine years and only three, including CP, have led to proxy battles.

A successful vote next week, he says, means "we are not going to have to run another proxy contest" because directors will not want to risk a similar humiliation.

"In every significant boardroom they are talking about the Canadian Pacific proxy contest and … what is the right thing to do for a board. Directors are sitting up more straight and reading board materials more carefully and questioning the CEO more intently. That is a very, very good thing."

Few directors will want to endure the kind of public thrashing Mr. Ackman has given CP's directors.

He threatened CP's chairman John Cleghorn with "nuclear" war in an e-mail, publicly questioned the accuracy of the company's financial reports and savaged the record of its chief executive officer Fred Green. The activist makes no apologies for his harsh crusade, which has elicited furious denials and demands for retractions from some of CP's establishment directors.

"I am always prepared to do the right thing regardless of what other people think. That's my whole thing, my whole mantra. In order to do this you have to have a thick skin," he says.

Since he started his first hedge fund at the age of 26 in 1993, Mr. Ackman quickly established himself as a brash investor who liked to place contrarian bets. One of his bets was so controversial that it was responsible in part for the winding down of his first fund, Gotham Partners, a split with his founding partner and an investigation by the U.S. Securities and Exchange Commission.

The investment was a multimillion-dollar bet in 2002 against MBIA Inc., a major bond insurer which backed shaky subprime mortgage investments. Mr. Ackman saw a company that was dangerously undercapitalized for what he believed was a looming financial crisis. His bet was prophetic, but it would take seven years and a financial crisis to prove him right. In the meantime, the SEC launched an investigation into whether his fund was improperly acting in concert with other investors to drag down MBIA's stock price.

Mr. Ackman describes the night he learned in January, 2003, about the SEC investigation "as his darkest hour." He had been told earlier in the day that his grandmother was dying and, muzzled by his lawyers, he was unable to do what he does best, defend himself publicly. "It discredits everything that you have done up until that time. You have no ability to defend yourself to the entire world."

Transcripts of his testimony to SEC officials offer an insight into an audacious tenacity that defines Mr. Ackman's activism today. Several times during the examination, Mr. Ackman turned tables on the regulators, giving them lengthy speeches on MBIA's risky financial structure and demanding that they instead investigate the insurer.

He wrote letters with similar arguments to the head of the SEC, which later dropped its investigation, and to New York's attorney-general. He cornered financial analysts, accounting and rating agency executives at funerals and parties to warn them about the insurer's looming crisis. But for years, he said, "no one believed me."

In the interim he wound down Gotham Partners. He says the vast majority of his partners recovered their investments in Gotham, and the few that suffered losses were invited to join his new fund, Pershing, where fees were waived until they recovered. At Pershing, Mr. Ackman continued to bet against MBIA and years later, in June, 2008, his endurance was rewarded when rating agencies downgraded the bond insurer's triple-A rating, sending the company's stock, bonds and business into a deep tailspin.

The decline made a fortune for Pershing and Mr. Ackman, who personally pocketed $150-million (U.S.) from investment bets that profited from MBIA's decline. By 2008, however, MBIA was no longer an investment, but a principle. Regulators, auditors and other gatekeepers had ignored his warnings for years and he did not want the spectre of "dirty" personal profits from a drowning company to cloud his message about systemic failures.

The activist has donated all of his profits from the MBIA debacle to a charitable foundation. He has gone on to make new fortunes by betting on other laggards such as U.S. retailer J.C. Penney, shopping mall giant General Growth and CP, but he says money is not the only motivation.

"This is not all about the economics for me. I am rich already. … The biggest driver for me here is my desire for independence and to grow the reputational equity of the firm. At CP, I have put a stake in the ground to show what we can accomplish here."

He may be comforted by success, but it is doubtful that Mr. Ackman will ever lose his urge to negotiate better deals. Minutes after the hedge-fund homerun hitter placed his order, our waiter arrives with his naked tuna burger surrounded by a swamp of sautéed spinach – enough to keep Popeye going for days.

My grilled char arrives next, alone on a plate. The restaurant had given him my spinach, which he never finishes.

Editor's note: In the interest of fairness, The Globe and Mail also offered Canadian Pacific Railway CEO Fred Green the opportunity to sit down for The Lunch. The company politely declined.

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IN HIS OWN WORDS

Early career aspirations

"I have always been a kind of a 'change the world' kind of person. When I was 19, I was going to allocate as much of the world's resources to me as possible and then reallocate them the way that I thought was right."

On why he never gives up

In his freshman year at Harvard he wrote a book about how to write the best college application essays. The book was rejected by publishers and a year later a pair of Yale University students wrote a similar book that was a bestseller. "It killed me, just killed that I didn't follow it through. I made a decision, I swear to God, that if I ever had an idea and I was confident that I was right, I wouldn't let anyone discourage me from pursuing it."

What kept him going in the seven-year MBIA odyssey?

"They were doing everything they could to run me off the road … I believe they had wronged me. I believed that my fundamental right as an American was free speech and I felt that it was good for America that these guys would be discovered and people understood the systemic risk they were creating."

On tearing up during speech after losing the Target proxy battle in 2009

"I think I was physically exhausted. I wrote this little speech on my own, I got caught up in it, a little tear, whatever. It hadn't happened to me before. I didn't draw a tear on losing the Target proxy contest. It was a tear relating to the other emotional experience at MBIA.

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CURRICULUM VITAE

Beginnings

Born May 11, 1966, raised Chappaqua, N.Y.

BA Harvard College, 1988.

MBA, Harvard Business School, 1992.

Career

Paid for expenses at Harvard selling ads for student travel guides.

1992 Founded Gotham Partners hedge fund with David Berkowitz.

2003 Founded Pershing Square Capital Management, which today employs 45 people to manage $11.5-billion(U.S.) of assets.

Personal

His father Lawrence Ackman works in the office next to him and the two co-invest in real estate properties.

He and his wife Karen have three daughters.

They have a co-op overlooking Central Park, a beach home on Long Island and house in upstate New York.

Hobbies

Tennis, fly fishing and cycling.

Investment Strategy

Pershing Square is a niche investor that buys minority stakes in underperforming major companies. It prefers to work with boards. It has lost one of three proxy contests.

Investment homeruns. MBIA Inc., General Growth Properties, Fortune Brands.

Investment strikeouts: Target Corp. and Borders Group.

Jacquie McNish