Transcripts For BLOOMBERG Market Makers 20140423

We will talk with at ts cfo. Qwest talks broke off. We will ask the chairman about the merger. Market makersng here on bloomberg television. Qwest right now, breaking house and housing data. Qwest this is a genuine surprise. Sales coming in way lower than expected. We are talking about a terrible month of march for new home sales. This thing home sales, you will recall earlier this week, they came in better than expected. 14. 5 . Ped 1445 we have not seen seen a month this that since july 2013. You have to go back that far to see a month this that. We have not seen a decline like this i think, since then as well. Not immediately clear what the explanation for this is. We know there was bad weather and we know people were holding off purchases. If that were the case, we would for seen terrible numbers existing home sales as well. We did not. I am at a loss. Qwest people are selling. We will give you updates throughout the show. We will bring in mike mckee to dissect it. To the, we will get newsfeed. Another russian bond sale has officially failed for the seventh time in eight weeks. Russia did not sell bonds because investors demanded high yields. 8 10 of onesen percent since Vladimir Putin sent worse is into the ukraine. For delta airlines, higher airfares and fuel costs be the nasty whether. The nasty weather. Winter storms forced delta to ground more, the 17,000 flight. Check out the Four Seasons Hotel unveiled the tripped out boeing 757 used to take out a trip. Jet has 50 ccns mereake us will cost you a 119,000. It is hard for me to care for that headline. Im going to need firsthand experience. Class i am with you on that. Lets turn to one of the countries, biggest wireless companies. Beating First Quarter estimate. One reason more at t customers are paying full price for their phones, rather than agreeing to the twoyear contract and getting up front subsidies. That means the boost could turn out to be temporary. Dallas this is in morning. It seems as though that is where we need to begin. First, as it concerns tmobile. How long do you expect this war on price to laugh and who will have to bow out first . Thank you for having me. It has been competitive for number of years and i would suggest when a customer is willing to pay full price for a handset, it is only natural for him to get a better deal on his service lands. Providingoice we are customers and i would suggest it is just giving them different choices rather than a genetic pricing in the industry. Qwest fair, but your company is playing a different role. Financing the purchase of the phone instead of subsidizing it request absolutely. We have the strongest Balance Sheet in the industry and some of the best customers in the industry. We are willing to invest in them. Highquality credit customers. Theybenefited by the fact pay their bills on time and were are willing to invest in them. Class it makes your Financial Statements a little difficult for shareholders to understand because the revenue it allows you to recognize the revenue. What happens several quarters from now if the momentum does not keep up . Any change in the industry will present challenges for understanding. I think your viewpoint is missing a couple of key factors. They have a history of updating their phones every couple of years. This is something that will occur year in and year out. Only a small portion of our Customer Base take that benefit normally. A a lot of room to grow that opportunity and to give that choice. We feel comfortable Going Forward that this will become an even more normal process in normal selection. Qwest whether it is at t and tmobile with better offers, that is great for me, but what is it is doing for you . Qwest you have you will see we had over a million total net as. To choice and transparency for our customers, the shift to an installment process, it is working really well for us. The other keys to our health, our churn is down from fourthquarter levels and inline in this noisy for usment it is working and we are excited. Qwest longterm, is it not just a race to the bottom . Absolutely not. When you take into account our Service Revenues and our customers possibility, they are up two percent. Not only are we growing our Customer Base, but we are growing the revenues we get from our customers. Change for this new accounting for home sales, what with the revenue have been . Class we will not give out detailed numbers, but i want to make sure the understanding is this is the international standard. This will be coming into the United States for 2017 and possibly before. This is not as abnormal or unusual as everyone suggests. It is the normal standard used on international accounting. Qwest ready stand now . Nothing has changed. Way very interested in the United States. You look at our results for the First Quarter. Great0 video net adds, Services Growth and tremendous wireless growth. You can understand why we are interested in investing in the United States and building on our successes. When we come back, bill to aman takes investing whole other level. We will speak to the ceo about their joint 46 bid next. Stay with us. Welcome back. He made big news this week in a a company that makes botox among other products. We want to dive into why hes doing it. Bill ackerman is here, along with his partner in the extraordinary endeavor. Welcome, both of you. Class michael, begin with you. Millions will be the acquirer here and take on assets and employ the synergy believes you can gain. There is a good reason everyone is so fascinated by this. The market is still struggling to understand is why you could not do this on your own. Why could valley and not go out . D buy contracts class a couple of reasons. Tradingis better at than we would ever be able to do. Have 4we did not risk mr. O put at ackerman and his team toward our cause. They now own 10 and they could be an independent voice. Finally, in terms of the probability of this deal being done, having a third party that is related our model and believes the combination is in the short or longterm is a huge asset. Qwest can i followup up on those points quickly . You are right valley and does not have the share purchasing it or tease but Goldman Sachs does, Morgan Stanley does. We would have to pay for it. Point, the third point was the fact you had bill forced to an acquisition. Lets get to that. Number. Et and know a if you put a deal on the table, they would help drive that forward. Qwest we hope they will. Qwest they are right now. Do you remember what the second point was . The second point was we had someone independent come in and and theyre model not just hoping the transaction goes through but he is committed to being a longterm investor. He sees shortterm opportunities and longterm opportunities. I think we would add less value in some ways. A meaningful part of the consideration, what youre doing, youre becoming a shareholder in the combined enterprise. Ultimately how this business does in the next five or 10 years. We were ready to participate, we had to be comfortable with the business. They have got an incredible track record. It is still a misunderstood company. Help them we could understand i would much rather self for stock. Have how many acquisitions you made . Well over 100. Qwest how big is your acquisition . One would think that would be a huge amount of manpower to get through that. Qwest we actually do not have a specific integration team. Our managers know how to integrate. The fact we are decentralized makes it easier. We have a team that will put them into their decentralized operation and do that very quickly. Theyre very experienced at Running Companies and integrating. It is core competency. Is there an acquisition you have made and said, heres what it looks like, we bought it, and now here is the Success Story . Most recent acquisition, terrific company, everyone has heard of it. Months later,five it is completely integrated. The organic growth of the company has accelerated since he bought it. The pipeline is producing a bunch of new products for us. The people, especially the ones outside the u. S. , love it. They like not having corporate telling them what to do. Ive now remember the point you made. You said bill put 4 million at risk. You have 4 million at risk . Math and i admit i am not a mathematician, but the contrasted not cost 4 billion. Qwest they didnt affect. We own a one percent strike call option. As soon as we get approval, we will acquire the underlying shares. The exact same exposure economically as if we own the stock. Collateral,a post billions of dollars on , and when we close on the stock, the reason why you do this, when you buy more than 75 million of cannot buy shares that kerry votes until you get approvals from the government. What the government allows you to do is buy with options, get approval, and once you get theoval, you can acquire shares. Every dollar that goes up, we benefit. If the stock is down, we benefit by one dollar. We have the same exposure. Qwest that is what people need to understand. To buy oran option sell or not to. Youre saying that is not the case. You have an obligation to exercise . No, it is an obligation. The stock, 120 five, we bought an option that a dollar. Very little option alley. Were looking for a way to be exempt from acquirement. We allow economic exposure without having to file first with the sec, which would give the company noticed. Qwest her phones were ringing off the hook yesterday by a an assortment of people. Have the regulators said, lets take a step back and walk through this, have those whove possibly sold to you, are they saying, wait a minute, this does not smell right . Class i have no idea. Every time we sell stock in a in the vaste majority of cases people have sold to us, people see a move in the stock price and sell into it. Ton we buy back, they tend be better off. People sold to us at . 34 and now 38 a share, they probably should not have sold. We partnered with valium valley and valleant. Qwest a lot of people look at the partnership and concluded there is nothing wrong or illegal about it. It is possible it is one and done. The fcc is already looking at closing the 10 day window you had which allows you to go from 4. 99 to 9. 7 . That the fcc talk will look at redefining a group so you have to be corporate buyers and not a financial buyer like yourself, or that perhaps the prenotification requirement you referred to come which only applies to voting shares, would be extended to Beneficial Ownership through auctions and former conference like you have. Qwest you raise a lot of important issues. The important issue is, if you look at, there are a lot of examples of companies that very logicale merger candidates. Shareholders say, why did company a not combine with ompany b . Everybody likes being a ceo. Qwest that is right. If you think it is a healthy thing for the markets to have investors like us to take stakes in the companies and catalyze corporate chains like this, a Catalyze Companies to operate more efficiently, you should allow us to continue to buy a large but Minority Stake in the business is. It would be wrong to wake up overnight and the control should be given to someone else. If bought 60 , there is an issue. If you think Shareholder Activism is a thing for stock markets and capitalism and capitalism in keeping the balance of power, what you do not want to do is restrict activists from buying four percent of the company. It will meaningfully diminish. People are reluctant to the world and are fighting activists, theyre largely trying to protect entrenched management. They make the argument this is all short term. Weeve the shortterm are not shortterm. This is the opposite of a shortterm deal. We are saying the combined is a much better business. We committed a large amount of capital to the entity. We have a contractual to own the stock and we are a big believer not just in this transaction but when the company once this deal gets done, we believe what happens to this 1mpany from here, 102, hundred 3, 1 hundred four. Qwest you said you have over 100 acquisitions. How did you have the money to pay for anyone else . It seems like an extra night number to me. Qwest many of the deals were small and most were with private companies and not competitive. We have taken advantage of the low Interest Rate environment. We have used debt. We have deployed six percent and returns on acquisitions. As we buy them, those returns, that is a Good Business model. Qwest one of the points i made yesterday in our is this presentation is if you are a player in industry where you have an enormous advantage in your operating strategy, your productivity in your salesforce, you could afford to pay what looks to the seller like a big price relative to what they are earning in that asset. I made an analogy yesterday, the 3d three g. Int they have accomplished the brewery industry and burger king, the reason they could buy burger king at a premium and the Public Market transaction in the Company Owned by private equity, they have a more efficient way of running a business. They built a Business Model much more efficient than the entire industry. They could pay a very good price to shareholders, but it is still an attractive return because they could run the if the business more efficiently. That is a competitive advantage for the company. Potentially dollar industry in terms of the public and private companies and industry who are potential acquisition targets, that is a very powerful combination. Qwest yesterday, the Investment Bank its bankers who cover ou, are they out of business . No, they say business. No problem there. We have been focusing mostly on investors. That is where we are spending our time. Qwest the point youre making about bankers, when asked to the first question about why you needed to do this with bill, you said if i had gone to Goldman Sachs were jpmorgan or Morgan Stanley or whatever, it would have cost me money. One way looking at this, is that it is costing you money. You came in at a price much lower thans where stock is today. If this goes through at the price he offered, the difference would be considerably wider. Why not look at this as a transfer of value from valley and to purchasing square . If you had gone and bought those forward contrast, whatever would beere would be upside to valiant shareholders. The vast majority of the upside is going to square. On the point of paying for advice and Capital Markets activity, yes, a few hundred million dollars, but not a billion dollars. That is what were talking about here. Risk 4ll put at billion. We did not have 4 billion sitting at the bank. We do not acutely cash, we use our cash. Second, he took real risk. He took risk, he would start buying but we did not decide until monday night with our board that we would move forward with the deal. We could have chosen not to and their arguments for and against. Nothe end of the day, i do view it as a transfer value. The price we would have set and same with orhe without though. Some shareholders will benefit. Just so happens, if it works, bill wilson benefited our shareholders will benefit more. All i care about is our shareholders. Someone else makes money, and it enables us and me to deliver more shareholder value to my shareholders, i am fine with that. Qwest i understand you dont you do not see it as a chance transfer. Some people do. Qwest here, they are able to get the benefit of the target Company Without putting up any capital. We take a risk on that investment. We have the upside and the downside. They can choose not to. Reputation if someone else comes along and pays a big price and comes away, that is great for us and they will make some money. They get our profit. Qwest one of the other reasons lie hostile deals do not tend to happen, they spend a lot of money with Investment Banks, they get commitments, and in the deal ends up getting shot to someone else and they get nothing. Here, they get 15 of our profit on investment. 15 wasow did you decide the right price to align interests . Qwest you wanted lesson he wanted more. He probably out negotiated me. Price to is the right align your interests because a higher price to another buyer, that is great for you and you get 15 , but you get 85. Class i would love to focus you on what is really happening. Deals are very interesting, but what is happening is the entire pharmaceutical, industry is changing. There is a dynamic happening. There is a lot of costs in these industries. One of the few industries not enforced to operate with the same kind of economic industries. Mike and his team had been a driving force leading the charge and making this a more shareholder oriented industry and making it more profitable. One of the problems is the Gross Margins are so high and we have a business that makes so many margins that we do not focus on a researcher. It is a very high business, but they operate as if they are a low margin company. Qwest what about the criticism that you do not necessarily have organic growth . You fire salespeople and then two years down the road, what happens to those . Do you just need to churn out another acquisition . Our critics say that. We do spend money on r d. We are watching 19 new products in the u. S. This year. Model,e have a different we do not invest in earlystage highrisk r d. We invest in low risk r d. Late stage. We do r d. Our sales forces, we have more sales reps spend most companies out there. In poland, we have 400 sales reps and thousands in places like russia. We invest heavily in sales reps. We do not invest in people sitting in offices. People sitting offices, you need your finance or itt team. Qwest it is a beautiful case. When you look at this, do you say, we will do this today and a special purpose vehicle, the first one, i will do this 10 more times in 10 Different Industries . It is really a beautiful case. Not want toay we do partner with everyone. We want people we want to partner with people in industries we like. Establishing a position ultimately in the company. That is not just for us before other shareholders. We can facilitate transactions. If we can get this done for the company and working with the company to get this done, i think this is a great thing. Qwest our blackstone fat and happy and you put it to them right now that everyone said, why doesnt everyone operate like you . Class we are just focused on this transaction as bill said. It is is you shall you. What is nice is our shareholders, theyre going to put a stake in the upside. They will own half of this company. They not only get cash, so we are focused on this transaction and i cannot speak to other companies. Qwest when you say health care presented this unique opportunity because it had not been disrupted in such a fashion before, is that to say, you see opportunities for investors to do much more interesting echo qwest ive never invested in a Healthcare Company that i can think of a twentysomething years. The reason is it is a very difficult industry and most pharmaceutical companies, they have got a patent life and a black box and theyre trying to invent new products. It is like a Venture Capital business. What is unique is this reminds us much more of the companies we want to invest in there. 85 of the products are the kind of products where in health care, it is like advil or face cream. It is more like unique products. Products it is a huge r d budget but botox, breast , it is highly regulated is more of a Consumer Product and has more of recurring characteristics and more the brand type characteristics than things we like. These are as opposed to businesses were your consul elect in drug and someone introduces it tomorrow. That is why there is a combination between the two companies. Qwest Stephen Leicht this company, you are really invest thing in management style more than what the actual product is . If that is the case, that is a whole new way of investing. As i go back to my three g analogy. Does heinz and burger king Anheuser Busch have in common . They are all in the food what they really have in common is an industry with good Gross Margins but not the most efficiently run industry. You have operators and three g phones, the best operators in the world, they have applied their operating competitive advantage in the industry and a made major advantages and created extraordinary wealth for the founders of the firm. Breast implants, french fries, and beer. Just enjoy products. We have to take a quick break here bill ackerman and mike pierson will stay with us. This is Market Makers on bloomberg television. Amazon, fire tv, and apple tv. Lets live from bloomberg headquarters in new york, this is Market Makers. Qwest youre watching Market Makers here on bloomberg television. Back. We are has been an investor. What are they said since all the news came out yet the why did you call us, we wouldve liked to been a partner . Qwest they were on the board. They were crucial to bring amy on the company with ceo. As ceo. A different model than bill does. Havedo not they do not money ahead of time. Their approach is more to invest in a company and get on a board and make changes. A different model than phils approach. No one is being rated. E help you have to ask them. Qwest you are their largest shareholder. You are their largest shareholder. What happens next . There already gone. Positions in place. Even if management is open to a deal at some point, they may not be open to a deal at this price. What will you do . What do you anticipate . What do you think might happen and how do you to do you two plan to respond . Qwest the hope they can sit down that their job and my job. We feel we put a fair offer on the table there if you look at disciplined. We are in this case it is nice, the shareholders are the same. We will sit down with them. We want to get a deal done. We will be very disciplined. We think there is a lot of value on the table to request what does very disciplined mean . Some people would translate it to mean we are prepared to walk away at this price. Reasons we like sally and is because they made a lot of acquisitions but did not overpay. The value of the company, a huge part of the value of the company, is based on shareholding and management deals that make sense. You could by any company that overpays. What is good is usually it is bidding cash for the company. Other transaction was a stock deal, the first in years where theyre using stock as part of the deal. It is a winwin. , ay will get the benefit huge part of the benefit of value being created and 40 in cash. Delicate balance of risk and reward, 48 off the table. A company that will become more valuable. As a shareholder, you would say, want the acquirer to overpay for me, when the acquirer is paying in stock, you want them to overpay for you and theyre after, never overpay for anything again. Ceo on a stock you do not want an interest in. What mike has demonstrated is offering full and fair value but not overpaying is able to view 100 transactions over six years. We have walked away from a couple and there have been a we are not, this to us upping down our premium a significant amount. Qwest if the answer could not be both, i would look at valley and right now, which stocks should i buy . Qwest you should by valiant. Stock is trading a couple above the value of the transaction. In a deal typically, the treasurer buys the stock of the company being acquired. The company could push down value of the acquiring stock. What i would do is you might buy the stock and short the stock on you have got a premium. They are trading above the price. A simple thing to do is just to buy the stock there it if you thatat the stock today, means a low price for business with high singledigit and organic growth dates. If the deal never happens, your fine. This stock was 150 a month or two ago. Today, it is 135. Happens, we could together some numbers in our presentation and we think the business looks a lot more like consumer packaged goods companies. If you take the patent drugs and value them and take the rest of the business and value them, you get business evaluations before assuming any value before a platform. We think this is easily a 200 stock when the transaction closes. Qwest you want to turn the fat. What does that mean for management . For the ceo . Uture he is one who created it. The company has been a good performer. A well respected company, with great products. If we integrate, some Senior Management might like our model and want to stay and we might keep them and some may not. Tworly, we do not need ceos, we do not need two cfos, and we will make those decisions. You have drawn inspiration from many different sources, including, at one point, one of our former colleagues. Where did the idea, the genesis, for this approach originate . Qwest everyone is saying right now qwest game changer, how did you come up with the idea . Qwest mike and i bring different advantages. They have an incredible ability to operate and run in the industry. Out. Give a shout there has been a great leading activist investor on the board for six years. They created an enormous value and that is 25 ago. We are coming in 25 up and from were just applying the same kind of technique used. Then we work with the management and the board and the shareholders to propose changes to make it more valuable. Here, there is a benefit of the change. I have a very good analogy. North america, stock was 46 a share. We bought 14 of the railroad and had in our pocket hunter harrison, the greatest railroad ceo of all time. Very similar. We had to advocate for hunter to become ceo of the company. The board initially rejected us. We have 13 directors. The board elected hunters ceo. 170 five yesterday. We are still a major shareholder. It is a little bit smaller than our investment but still 23 of our capital. Thing doing the same here. The differences, instead of just a ceo that was retired at the time, we have a good we have got a whole Management Team and thatategic infrastructure can create the synergies. We are buying 10 of the company. We will assist valiant. It is a model for anyone. If this is what you do for a living, i think we have unique attributes, but there are other very talented people in the industry that could do the same thing. Qwest it is clear you are a longterm investor. You have said you would take this to the end of the and of the earth. Things are going in your direction at this point. Will you not get out of this until he goes to zero . Risk versus reward, i do not think the stock gradually goes to zero. It is more of an overnight phenomenon. A criminal investigation, the department of justice, the fbi launched a criminal investigation. After 15 months of our being for them to this, launch a formal investigation, i do not think it is well known by her viewers your viewers. It is a chance to make money and they are even more careful. For them to go to a formal investigation here, with their timetomarket is that they certainly see evidence of Serious Problems from the company and the track record in going after pyramid schemes, they have 100 batting average. 1970s,an amway in the when they go after an extensible Marketing Company for legal isues, the evidence here incredible. One of the things i find remarkable business is the stock is 57 a share. Overvaluation. Qwest at this point, i do not think many people will fight you. They arerman, the t the menu do not want to go ahead with. There you go. Good luck. Congratulations. Big deal youre working on. So ackerman and mike pierson on their hot deal. Thank you for joining us both. Coming us up, the art of the deal. We will see whether the proposed saved. Can be the us is the founder, chairman peter mc. Yes a new day is dawning. The Worlds Largest oil producer is about to get a new chairman. The founder and current chairman is stepping down. This comes at a busy time. He is reportedly in merger talks with his biggest rival. There is a lot to talk about. Here now for a bloomberg exclusive, peter, it is great to see you again. We know these discussions have been held with newmont. Newmont is your biggest rival. These discussions have not taking place taken place for the first time. Why would this make sense . Because whenense andinvest near each other are doing an identical job, we both parties told, and most of the gold comes from the property trend, thether same world passes most prolific trend, in the middle of nevada, they have been there for 20 years. We produce more and got luckier. Are, and we have sought a number of times, maybe four or five times. But it is different. A different manner and a different issue today. For the first time in the last decade and a half, they had been down and not up. Sitter just become cumbersome is wise, much more relevant than they were. 50 higher. Not resumeld does its upward trend, this deals inevitable . I am practically retired. Class im speaking in principle. What is so appealing to you about consolidation . I built my company and started with 14 billion in a pretty established industry field that has been around for 125 years. Oppenheimers controlled it in south africa for a long time. Homestake, some major, major corporations for billions of dollars. Sometimes, there is always a new face. You just had bill here. If we use glencore from example, it is a gold company. No, the mining company. Then you reach a certain plateau. Been natural i, who have in the mining circle, which is my business, i talked to the head and we talked about opportunities to exchange metals and copper and gold. The fall people made major takeover in canada. Was a major thing. Time, we became friendly, naturally. Casesre together in many in mining circuits. Talkingnot mean we were to the extent in newmont. We were talking. I see. Peter, if you look back at the past five years, clearly, the gold price has not helped. Much of the remaining damage in , what i was going to say is that it was selfinflicted. We are saying the same thing. You blamestly, do yourself for what has happened class holding a 14 billion company and i get the i. T. , you cannot have it one way and not the other. When you build a company, we have done 14 takeovers. You cannot help but cannot always be right. The key was the stability to come out of it to improve our Balance Sheet and operations every single day and every single quarter. All you can do, you make a mistake. And look. You live to fight another day. Thank you. Thank you. The retiring chairman, john ofrton taking over as head the board. We will be back in a moment. From bille just heard ackerman. Next, we will look at the agenda for the entire hour. Bill george will be here. Stick around. Collects attack of the activists. Attack of the activists. It might be a game changer for the industry. Activists are going after far bigger gain. What are companies doing to fight back . Ebay may have the textbook the new, a full hour on era of activism right here on Market Makers. Looking back to Market Makers. I am stephanie ruhle. And i am Erik Schatzker. We spoke to bill ackman about his latest investment. Thething we have not seen likes of for generation. Teaming up with valiant pharmaceuticals to purchase a rival drugmaker. This makes it a good day to focus on activist investing . We will be spending the rest of the show doing just that with with two special guests. He serves on the board of Goldman Sachs and the mayo clinic. He runs blackstone advisory, you might think of it as their Investment Bank. Someone who knows a great deal about the business. So, gentlemen, lets begin with this. John, if you dont mind, i will put the question to build. When i look at build ackman teaming up to by allergan, i think in a lot of other people think i have never seen this before. This is a game changer. Corporate boards around america should be running for the hills. Should they . They certainly should prepare. The key is how well prepared our corporate boards . In the 1980s the raiders and up a lot with junk bonds, with mike melton, in the 1990s we saw private equity firms doing similar things. But i think that will ackman is a tenacious guy willing to take big losses to get big games. Liken this to a corporate raid . Of course, yes. So, bill ackman is a longer we should not just look at him, he is investing with pearson. Pearson is making the big that, saying that he is betting on a whole different structure. Is not corporate raiding, that is just m a, wouldnt you say . I would prefer to describe activism. Ctbased one more time . Factbased activism. The best activists spend months embracing what they are going after. In this case you have a situation for bill is investing in a vision. Rather than basically doing the inhouse work, which he has done many times, the best activists that we know do 3, 4, 5, 6 months of work, here he is partnering up with a very skilled ceo with a track record. What is the risk that this is one and done . It is legal right now, but food regulators say that this is too slick, too cute, not again. There is nothing illegal about this. We could question the 10 day time. Time period. You have overlooked pearson here. As john was saying, pearson has a successful record of acquiring and restructuring companies. That is what is really happening here. The question is at a certain point in time he has to operate the companies he has put together. That is where the jury is still out. He has done a brilliant job. I can see how the two of them will come together. That is not hard for me to see it all. They are of like mind. If it is good to rewind for a second, lets listen to bill ackman in his own words. We dont want to partner with everyone, right . You want to partner with the best Management Teams in the industry, companies with competitive advantages. This is not popping a stock, this is establishing a large position in a combined company that is an extremely attractive position not just for us, but for valiant shareholders. Mightthat is the case, we not see, john, bill ackman in Pershing Square repeating this exact structure or this exact approach. Maybe even never again. But hell told us that he for hedgeas a model fund activism. Would you agree . Will others look at what he is doing and say wait a second, i can do that too . I think there is probably 75 or 100 different types of activists. No two activists have the same type of model to follow. For example, value activism is in the shareholding, as you know, of valiant pharmaceuticals. A very different approach. He has been a longterm investor and has had a profile on the board. Is it one case study fits all . No. But this is now the scenario where chief executives, to your earlier comment, are going to think about this when they think about big money activism. Uniqueemember, bill is like few others in that he is prepared, as my colleagues said over here, to invest a lot of money up front he says he believes in the track record of mike pierson and his vision for the combined entity. Most importantly he wants to be an ongoing shareholder. If you are sitting on the board of allergan, what are you thinking . That i shouldve been prepared before. Here you have two very different philosophies. Allergan has a big event philosophy, to build a giant company for the long term. There is a split owing on in the pharma industry. Some say that they will go that route to purchase from biotech, others say they are in it for the longterm. But the key is to have a plan and stick to it. You really have to have your board fully prepared. You think philosophy when you wake up and bill ackman is thin and your front door saying guess how much of you that i own . I dont think you will capitulate easily. I think you will find him shedding assets and doing everything he can to stay independent. Is this a shot across the bow of every corporate ward . Bills point, you need to be prepared . Look at novartis, to some that appears to be the anticipation of activism. It is very simple. Into every boardroom in america right now and you say to them what is your biggest fear . Their biggest fear, for those who do not have activists . They do not want activists. They fear those obsessed with activism. The punchline, the ceo does not wake up, look in the mirror and say why dont i look at myself and become the activist for my own company . In other words, wake up and become an activist, mr. And mrs. Ceo. That. St ceos already do they think of themselves not from the standpoint of a caretaker, but a visionary. We can debate that in terms of r d and crossed cost structure. If youre chief executive those i am close to, i say to them attend you are an activist. Do not sit there and be assessed with an activist coming in the back door. The pragmatic. Look at yourself. The way activists look at companies, that is a fairly easy playbook. There are about 10 criteria. If a company is insightful, they will look at them. Rather than playing to the analysts community, focus on how these 10 or 20 activists would look at me. Am i really returning to my shareholders what i should be . That is exactly what i would recommend to boards and directors. Several of them. Take the analysts and say how would you take this Company Apart as an activist . And then act. In effect what they are saying is that that is not as what is happening in corporate america. That for however long, 10, 20, 40, 50 years, ceos have not look at themselves as custodians of shareholder value. A boondoggle. This is a shocking, shocking question. That the asset class they have created requires of amergence of him nonexecutive director, which i think is quite good for the chief executive, it gives him or her someone to talk to. It has given the boards more power and authority, which 10 years ago was not the case in corporate america. I actually think the leading companies have done precisely this. Like who . Like who . Yes. Whole foods. If seco is the best example i can give you with. Pepsi co. Is the best example i can give you. Reshuffling the company in 2004. They can demonstrate 1 billion in savings every year for the combined businesses. You can see it in a company like walmart. She is on the right side of the trend. That is why their stock is way up. With a woman ceo . Why not . Rice women are the best. Lets not the gender into it. We have to take a quick break. We do. Coming up, we are going to look at more deals. They are not all slamdunks. We will look at the winners and losers of activist investing. A truly special day, we are taking a deep dive with some of the smartest people in the business. You are watching bloomberg television, streaming on your phone, tablet, bloomberg. Com. Stay with us. Activist investing, that is what we are talking about. It has never been this active. 369 activist campaigns last year, up 12 from 2012. Investors are pouring money into the Companies Run by the likes icon. Horn, ackman, and lets take a look at some of the biggest hits. He has been called the godfather of activist investing. The boards may call carl icahn something very different. He has been doing this for a long time. In the 1980s he doubled his money on texaco. New activists have been as busy few activists as been as busy. In an unprecedented move he is teaming up to buy the company. Are wrong wayfar bet, but the trade may be turning his way after a plunge in herbalife shares this year. In 2002 he shorted mbia, saying that it did not deserve a aaa rating. The financial crisis proved him right, he made 1 billion for his clients. Dan loeb rocked Silicon Valley by buying a five percent stake in yahoo . Pretty soon he and two allies were on the board and Marissa Mayer was bought in as ceo. Less than one year later he sold his stake back, profit of 130 . Nelson phelps likes Consumer Products. He has taken stakes in wendys and the snack makers, but his biggest score came with snapple. He bought snapple for 300 million in 1997. Three years later he sold for almost 1. 5 billion. All right, we continue to deep dive. George,ing back bill Harvard Business professor, and John Stravinsky, who runs the blackstone Investment Banking division. Lets focus on the fight against ebay. John, what is your take on the whole thing . Comes in,nahoe restructures the company, gets rid of skype, buys paypal, focuses on integrating the platforms, has done a brilliant job, the stock is up over the last five years. What is not to like about that . Why not go after more Bond Companies that are not doing the right thing . He has a strong, unified board, he is doing everything necessary. He has a strategy and he has stayed with it. He has integrated the platforms, is leveraging them both, his problem is google and facebook and how to keep his platform going. But he has a very strong independent board with capable people on their who continue to upgrade. Probably the strongest board in Silicon Valley. I think he is doing the right thing. What do you think . I think that when this case study is taught it will be taught as a case how a case on how activists can use the way thana much broader corporations. Corporations are bound by lots of pointyheaded people telling them what to say and not say. The pointyheaded people cramped our style every day. This particular case is interesting. You had carl icahn using the media with respect to letters, disclosures, and the press, but he met his match because whereas most executives are not that comfortable dealing in a casual way, in an inyourface way with the media, john donahue, scott cook, Mark Andreessen, are very comfortable dealing with it. To read, if you were the Mark Andreessen blog during that time, there was a daily, rigorous, robust rebuttal of carl icahns position. I have one other point, but i will shut up. Give it to us. No, no, no. Python earlier about factbased activism. Yesterday bill made a detailed, plausible, factbased place case. Factive is him factivism. Recall in his position visavis paypal and ebay that he made a factbased analysis. John brings up a great point. This has been the same argument that bill ackman has had regarding herbalife with every Single Person all along. Line up against me, pound for pound, i have done my homework. Have you . How about factbased management . Carl icahn would say that he did present a factbased case. In his letters to shareholders he laid out his argument. He made an argument, persuasive or not, that is the eye of the boulder, but it was certainly based on fact. I dont think it was as rigorous as a lot of the other types of facts. At carl icahns track record. Does he need to prove rigorous, factbased work . Look at those numbers. He did a great job with bio junk. He brought that company back and did very well. But anyone can pick up the facts and find someone they dont like. He actually tried to split the board. One of the key points is you have to build your board chemistry in advance for years. You have to have them unified. Why are we doing this . What are we doing . You need unification on the board. You dont just treat the board like a rubber stamp. Top ceos are using their boards very well to make some changes. Now it is paying off and that is why results at pepsico are so good. I called it a midcourse correction. John donahoe did the same thing. He built the board and used it. That is not true of a lot of companies. I am pleased to see this. Present your own fax. You had better have them ready. You would then agree with bill . That carl icahns problem in the case of ebay was picking the wrong target . Not the tactics that he chose to employ . Going back to my point, it is an example of how in this particular case ebay used the media to support their case to shareholders in a very robust, rigorous way. Most companies do that knowing all the legal ramifications. Carl icahn can sit there and get on the phone with a television organization. He has nothing to lose. You are right. Let me jump on the side of john. Ceos feel very constrained about what they can say and do. I have listened to them go after target. When they had that huge proxy fight a few years ago, it was very personal. I can tell you. With scott cook . It was very personal. He was looking for something to split the board. They have the power of the media and i think that ceos are constrained for legal reasons and are not able to fight a fair fight. That does not mean you dont be prepared. You have got to get your advisors lined up. Goldman sachs or whomever, you line them up, including your pr team. Ready to go. We have to take a quick break. We are taking it deep dive into activism. Stay here. Welcome back to Market Makers. It goes without saying that it is time for bloomberg to take you on the markets. As you can see, we are looking at Sodastream International. A company that youre probably familiar with. , reportings up 15 that Sodastream International advanced talks to sell a 10 stake to starbucks. There has been plenty of speculation swirling around them with names like dr pepper and starbucks being thrown around. Back in two minutes. It is, indeed, a special day for us. Before we get back to deep diving into activism, we have the top business stories from around the world. Here we go, a stunning drop in new home sales from last month. Economists had forecast new home sales would increase, the market may have been hurt by rising prices and higher mortgage rates. For the Third Quarter in a row, toyota has outsold all other carmakers. Percent in the First Quarter, second place is too close to call. Gm and volkswagen both say they sold 2. 4 million units. Job cuts may be on the way up to barclays Investment Bank yet again. Barclays could fetch could cut 7500 jobs in order to return improve returns on its securities unit. The fixed income commodities unit may be the hardest hit. If they keep cutting jobs . In is going to make money there . Stephanie said it, it is all about activism. In the last hour we welcomed bill ackman. Right now bill george and John Stravinsky are here, as well as mike mayo. Mike has embraced the trend and is calling himself the activist analyst. We are asking, who else should be speaking up . Welcome, mike. You and i have talked about this. There was an oped earlier this month in the new york times, where they made the case that a fringe minority was dominating the activist debate and more people need to participate. Institutional shareholders, like blackrock, for example, analysts like yourself, perhaps even the media. Is that how you see your self . Have you always seen yourself that way . Thank you for having this panel. Thank attention to the comments from earlier, this is my day job. You call it activism, this is our responsibility as analyst investors. Just because you have 100 billion in analyst funds, what about the 100 trillion in money under management . I got back from the annual meeting in st. Louis yesterday. We have the annual meeting for suntrust. You know how many people asked questions . One person, my associate. Why is that . People love to say that you are an antagonist. Do you say that that is unfair . I am not crazy, the rest of the world is crazy. I tell myself that all the time. This is not the theory from Harvard Business school. We need to board we need to hold the boards more accountable. In nowhere else is that more important than the banking industry. Before the crisis we said lets have the markets control themselves, but that does not work. We need to find a middle ground as far as the boards of directors are accountable, making sure they have the backs of shareholders. The first step is to hold the chairmans and boards of directors publicly accountable. The only time you can do that is at the annual meetings. Is mike right . Is the reason that people like him sometimes stick out like a sore thumb at an annual meeting is because no one else is doing the job they are supposed to be doing . Like Berkshire Hathaway is always a jamboree. First of all, i am not an institutional investor. But from a corporate standpoint, they should be talking to their big shareholders. I think that ceos and boards are way overreacting. They need to be out every day talking to major shareholders. That is one thing that pepsico did. Goldman sachs, they spoke to the shareholders directly. That is really important to understand. Come back to me, ask me the question, i want to know. You own the stock, you own the company. I dont want to talk to someone. Ho owns 8 10 of one percent i want to talk to fidelity and vanguard. Puthy does mike oneill himself out once per year at the annual meeting to face questions from shareholders . In the past year he met with investors as proxy. My issue with the big banks is they have got to get around the corners of it here you go ahead and ceo meet with investors oneonone. My point is that we as investors can only hold the boards publicly accountable. That is what is important. A lot has been written about annual meetings for retail investors. They should also be for institutional investors. John, if you were an insurance company, if you had a pension and endowment right now, could you look at blackrock, vanguard, and say that they were asleep at the wheel . You guys are here more than anyone. There is a lot of what i call closed door activism, or behindthescenes activism. I that i mean all the people that you just named, these Pension Funds are thrilled with the likes of the people you have talked about this morning. They totally agree with mike. They want these big, these big Pension Funds, these big endowments. They want much more critical, pro active questioning him of management. The interesting point that mike is raising is that the bright light has just now been reflected on the board. The board needs to be seen as accountable as well. This is not just about the management. It is the role that the board plays in governance. They avoided it after 2008. Lots of boards did a very good job of sidestepping that. To this day when you look at minutes from board meetings and what have you, you wonder why in the context those minutes are not more public. And why does that not become more of a media event . I like that. First of all, i think the wards should be held accountable in all cases. When aig forgets about the board they have the ultimate responsibility for the survivability and sustainability of the company. You go to european meeting, it takes 10 to 12 hours. As an everyday event, my concern is a lot of these institutions are using surrogates, ok . They dont talk to us. They say what does iss say . They dont hold shares. Why not talk directly to boards and management . Working behind the scenes. Like we talked about yesterday. There is a good reason for that. Meeting after meeting, shareholders approved packages and they reelect every member of the board that is up for election whether he is new or being reelected. If shareholders dont create pressure, why do they need to respond in management . That is our job. We report on several boards. We report to the shareholders, ok . We are responsible for the company and the shareholders. We need to be talking to them. We should not be sending the ir person out to talk. Haveould Goldman Sachs more than one . That is my problem, not yours. Should they have more than one meeting each year . They have meetings every day. How do you think these things happen . Our lead director is out talking to the major investors. I met with them in 2009 and 2010. They were frankly having all of these Public Relations issues. Citigroup has had five ceos in the last six years. At some point we say we need to hear from the ceo, but also those overseeing the ceo. By the way, these annual meetings . I would like to see not just the ceo and the chairman, but the giving briefittees presentations. For ex absolutely. We need to take a break. We will continue this conversation after the commercial. We have an allstar panel. We are looking at you. If you missed any of our interviews today, you can watch them on amazon fire and apple tv. Stay with us. With harvardk Business School professor, bill george, and john stitches and ski a black stone is here as well. Were talking about activism in the financial industry. John, i want to turn this to you. This country moans about banking fatcats every chance we get, yet we see very little activist investing or criticism. Why is that . Activists have lots of industries they like, lots of criteria. There has to be a certain amount of transparency and they have to have some sense of what the endgame is. They have never gone after banks vigorously he has there has always been a concern of not really having enough publicly available information. The only hero that they could start with would be governance. There has always been a concern over how to analyze a risk reward and what the return will be in the current inking model. Michael . Youre smiling like a cheshire higher cat. We will roll out the red carpet for any activist that wants to come into the banking industry. I am saying we, collectively. We are starting for activists among the large banks. A plan for every one of the largest banks out there. Having said that, i do agree harley with what john had to say in terms of the Regulatory Environment making it more difficult. Have nelson peltz on state street, one of the bestperforming stocks last year. You did have the free. For a time at Morgan Stanley. Michael price a couple of decades ago led to some of the mergers with jpmorgan today. Have moreve to activists in the banking industry. Would like it, the regulators would like it. We need to annex or catalyst. Whats i have a completely different point of view. The best banks are well prepared i have a completely different point of view. The best banks are well prepared. I can name those banks, ok . Jp morgan, Morgan Stanley Morgan Stanley did a total transformation last year. We do these things on all the time. These are complex institutions. No doubt. These would be easier targets for activism if regulators had not allowed these banks to combine and become as large as they are . Each one ofk those banks that i mentioned has its own model and it holds together today very well. It did not hold together well five years ago. People are moving out of things that dont make sense. We are looking at returns in every single segment of the business. I can assure you. And it is paying off. You can see the disparity now. To some degree they are too big for activists. So, when you get to the largest sized bank, two dollar trillion in active and assets . It is not just getting your head around it. It is economies of clout with banks that size. Much you want americans to be able to compete on that scale. You want people in apple who can complete compete on a global scale. This is a dominant field. You want to be able to serve customers around the globe, not just shrink down to being an american bank. Some banks are like that, they do a great job tom a but this means we have to be large, we have to manage risk. I will tell you, the fed is doing a heckuva good job. Maybe paul volcker . But we also want those large banks to return to shareholders their citigroup stock at the same level it was in 1993. He will not get me to defend them. [laughter] flex is there an industry well suited for activism . A look, stephanie, not a great question, i love you dearly, but not a great question. Every industry to a certain extent has candidates for what could be better run. Is there an industry that is right for it . We could have activism 101 here. One of the things they look at . Bad governance. Bad management. Misallocation of capital. Misallocation of r d. Business models that are not focused. I dont think it is an industry question. My question is why they are going to those best run companies today . They should be doing their homework. That is perplexing to me. The quieter activists do go after poorly run companies. Well, that is fine. On the corporate side we should get our act together and run well. Ok . We have got to perform every. We have seen activists this is not about tennessee a. Remember Sears Roebuck . Jcpenney . Ever hear of those . This is not a cureall. In by the activists, come and join us. Citigroup is making progress, lets shed the assets even more quickly. Bank of america, selling off brokerage, limiting merrill lynch. Selling branches in different territories. Mallon, we can go down the list. Seemed to agree with them. Come on in. Thank you very much. Mike mayo, our special guest for the hour, and bill george, board member on exxon mobil and Goldman Sachs, along with john stressant ski. This is your time, brother. That is a treat. Thank you. H it has been an amazing hour here on Market Makers. Chaminade, we have time for a quick final thought. , but dontred overreact. Remember, you have to run the company for longterm. Run the shareholder run the company for the shareholders who are staying, not leaving. The biggest risk is that we overreact. I tell my clients to wake up and pretend you are an activist yourself. Separate your discussion of earnings from the division and give your media more time. In other words, spend more time with the media about your vision for your company. Spend more time on Market Makers, with Erik Schatzker and stephanie ruhle. That is johns final thought. [laughter] why not. What a treat for the two of us. You. Ank thank you. That will wrap it up for today. Eric and i will be back tomorrow, but right now bloomberg is taking you on the markets. We send you off to the newsroom with scarlet fu. Stocks taking a breather after the s p 500 had its longest winning streak since september. Sales and chinese manufacturing of gone up. With a look at where the stock market might be headed next, equity derivatives equity derivatives set strategists. We have big nasdaq names reporting earlier later today. What kind of volatility are we seeing . Ahead of these announcements you see a spike in qualitative when you look at we continuegeneral to be at a low gullibility environment. Mix products definitely capture that. They tend to underperform as a portfolio hedge. Is better off using targeted hedges in their to get specific stock put spreads on a portfolio. Making it active, as opposed to just making it big. What about the vix as opposed , which made a 52week high 10 days ago. On the other hand, we did not lets getof it back of it. More customers are now opting away from full price for smartphones. Meaning pressure on their profits overall. What are you seeing in the Options Market . We saw some buying activity is morning. And i think that this is just pressured on in the next couple of weeks. How does this compare to verizon . At t has been underperforming last 12until the months, buying activity going up, but now it is taking some profits. On intel. Ade is they beat earnings estimates last week. No nearterm callus. Why we treat on it until now . This is still an options trader. Remember, i mentioned that you could not is low volatility for the overall market. Example of how you could use the low volatility options that have collapsed. We are looking at twoyear lows. The options are really cheap. I want to buy the upside costs for all of us. The . 30. Buy thank you so much. We will be back in 30 minutes. Lunch money is next. A welcome to lunch money. I am adam johnson. Heres what we have on the menu today, at the top we have a wildcard, our exclusive interview with mom at elerian. Company and a the plunge in earnings season. Through thoseu companies around the world. Taking a trip to asia, for countries that have a problem with china, the ultimate destination for anyone who likes the finer