Ackman may have set his sights too high on Buffett
Hedge-fund heavyweight Bill Ackman of Pershing Square Capital Management says his firm has the potential “to create our own modern-day version” of Warren Buffett’s Berkshire Hathaway (NYSE: BRK).
The post on X may be more fantasy than reality. It came last week, as Pershing Square announced a $900 million offer to raise its stake in Howard Hughes Holdings (NYSE: HHH), a real estate development firm. That would give Pershing a controlling share. “The new HHH will acquire controlling interests in private and public companies,” just like Berkshire, Ackman said.
But it’s not even clear that HHH’s board will approve Pershing’s proposal. It wasn’t too keen on Ackman’s original plan to boost his stake in 2024.
HHH owns real estate in the attractive markets of Arizona and the Houston area. Its free cash flow is ascending, and HHH said in November that a “conservative measure” of its net asset value is $118 a share. That’s a far cry from the $90 a share that Ackman wants to pay.
“The offer looks great for admirers of Pershing Square but doesn’t do anything for HHH shareholders looking to close the gap between the current stock price [$74] and the company’s $118 estimate,” notes Piper Sandler analyst Alex Goldfarb, as cited in Barron’s.
“We don’t see how HHH’s independent board could sign off on this transaction, especially as HHH doesn’t need the $900m proposed capital infusion.”
Flowing fees for Pershing
If the deal does happen, Barron’s editor Andrew Bary points out a major way in which HHH would differ from Berkshire: fees. The plan puts plenty of them into Ackman’s pocket. HHH would pay Pershing 1.5% of HHH’s value, which could amount to $72 million per year, Barron’s estimates.
HHH now has a market capitalization of $3.7 billion compared to $1.1 trillion for Berkshire. Yet Buffett’s annual salary totals only $100,000.
The boisterous Ackman, a publicity magnet, certainly doesn’t have the same track record as Buffett. Ackman has had some big hits in his stock buys, including Municipal Bond Insurance Association in 2002, Wendy’s in 2004 and General Growth Properties in 2008.
General Growth was one of the best hedge fund trades ever, with Pershing investing $60 million and enjoying a $1.6 billion gain.
Pershing’s losses
However, Pershing suffered a $1.4 billion loss when it sold out of Valeant Pharmaceuticals in 2017. And it bombed on its short position in Herbalife costing the firm $1 billion in 2012-17. Purchases of Target (NYSE: TGT) and Borders also ended badly.
Last year, Pershing Square Holdings, Ackman’s publicly traded hedge fund, posted a net gain of 10.2%, far behind the 25% total return of the S&P 500. And since the fund began in 2012, its annual net gain is 13.5%, compared to 14.8% for the S&P 500.
Meanwhile, Berkshire has generated a compound annual return of 19.9% from its start under Buffett in 1965 through 2024. That compares to 10.4% for the S&P 500.
Bottom line: Ackman may want to be Warren Buffett, but for now that’s hard to see.
The author owns shares of Berkshire Hathaway.
