Just before Bill Ackman turned 28, he was able to participate in the take over of Rockefeller Properties worth $1 billion at the time. How did he do it?
With the strong belief that you can learn investing on your own, Bill Ackman decided to start his own hedge fund right out of graduate school. But little did he know, no one would want to invest with him.
After being rejected dozens of times, he reached out to his professor in college, Marty Peretz. Peretz owned a publishing company and was reluctant to invest at first. Being a great salesman, Ackman finally convinced him to put up $250k to his new hedge fund — Gotham Partners.
Peretz investment gave Ackman an approval of confidence. He then used that to convince several more investors to invest with him. He and his partners eventually raised a total of $3 million. Even with that $3 million, Ackman would never think that just in 5 years’ time, his hedge fund would grow to be $500 million. It all started with one big opportunity.
In the mid-1980s, the Rockefeller family wanted to take out a $1 billion-plus mortgage loan on the property, but there wasn’t a bank big enough to lend it to them. Instead, they set up a public company structured as a real estate investment trust (REIT) called Rockefeller Center Properties.
REIT is just like a public company. If you buy shares of a REIT, you own a portion of the real estate property.
David Rockefeller was chairman of the board, and investors bought the stock largely because it paid a big dividend and they liked the idea of partnering with the Rockefellers. But as the real estate market was falling apart in the early 1990s, the company was forced to cut the dividend. The stock price collapsed, and the REIT was under a lot of financial stress due to its high debt.
Bill Ackman saw the opportunity. He figured out that since the REIT is trading at a very low price. It is possible to acquire controlling positions of Rockefeller Center Properties by purchasing the stocks in the market.
He believed that there is a huge long-term value of the real estate that everyone overlooked. At that time, Rockefeller centers had six million square feet of office space some of the most valuable yet undermanaged retail space in the world and two million square feet of air rights.”
His plan sounds exciting and potentially can tenfold his investment. But there is one problem — he didn’t have enough capital to take over the company.
Ackman ran around town trying to find someone who would do this deal with him. But no one seemed interested or even understood his idea. Not until he called Joe Steinberg. Joe Steinberg was the President of Leucadia National Corporation, a public traded investment company. He met with Ackman and immediately decided to partake in this deal.
They together bought a good chunk of the Rockefeller Center. Then they started to rallied the owners to recapitalize the company. Their proposal included selling Ackman and Steinburg additional shares of equities with special rights attached, worth around $150 million. This would allow both of them to own the Rockefeller Center.
A rights offering (rights issue) is a group of rights offered to existing shareholders to purchase additional stock shares, known as subscription warrants, in proportion to their existing holdings.
But the board turn down Ackman’s proposal and chose a different deal with Goldman Sachs.
Even though Ackman failed to acquire Rockefeller Centers, he made a significant return from the trade. But more important than monetary returns, Bill Ackman has made a great name for himself. After the Rockefeller Center deal had closed, Ackman walked away with some powerful players on his side. Vornado’s Steve Roth told Ackman that to call him next time he had a good idea. Gotham attracted prominent, well-respected investors as its limited partners. Hedge-fund legend Jack Nash gave Ackman $1 million to invest. Even David Rockefeller invested. By 1998, five years after opening up shop, Gotham Partners had grown from $3 million under management to over $500 million.
