A Rumble in the Billionaire Jungle

Ackman Icahn









By now, I’m sure everyone has heard of the tiff going on between Bill Ackman and Carl Icahn.  Frankly, I think it’s overrated and CNBC has done more to leverage the drama than the London Whale used in his derivatives portfolio.  That said, I was glued to my 19″ dorm room TV this afternoon to watch the slugfest unfold.  The entire bout can be seen here for anyone who missed it.

The vast majority of bloggers and TV analysts have been focusing on the rich history between these two moguls; however, I think the most important aspects of the entire debate were made by Carl Icahn and have been vastly overlooked.  Specifically:

1)  If Ackman wanted to be such a nice guy, why didn’t he just go to the SEC?

Touche, Mr. Icahn!  Obviously, there is a large motive for Ackman to make a killing for his investors if he’s right.  I highly doubt he’ll be as transparent with his tax returns to show how much of the profit actually goes to charity as he’s been with his investment thesis on $HLF.  At this point, he’s just as big of a pump n’ dumper as those lunatics on the Yahoo Finance message boards.  The lesson this taught me, though, has been no matter how right you may be about a fundamental investment thesis on a particular stock, there is no guarantee the market will realize the “truth.”  There needs to be a catalyst to move a stock price in any direction – especially if it’s going to $0.  Ackman has been on record saying he was short $HLF for the past year and a half.  We can speculate he was feeling the pressure of a lackluster year in terms of portfolio performance and needed to create the catalyst himself.  Not the most ethical route he could have taken, but it shows us how much more patient and liquid the market is compared to any portfolio on the planet.

2)  Incredibly poor risk management from the Ackman corner of the ring

Again, Ackman has been on record saying he has 20% of his entire portfolio invested in his $HLF position.  Technically, his investors can pull their money out of the fund at any time which would get him into quite the pickle.  More importantly, however, during the CNBC interview, Icahn gave the possibility of an investor stepping in and purchasing $HLF.  No matter how right Ackman may be about Herbalife, if a wealthy investor or hedge fund/PE fund disagrees with him and sees the price of $HLF cut in half, what’s to stop them from issuing a tender offer and trying to buy the company outright.  Icahn does it all the time!  It takes a great deal of time and effort for any company’s share price to fall to $0.  If $HLF gets purchased or even rumors get leaked, the share price will continue to rise and Pershing Square will be in a world of hurt.  Sure, as Ackman states on the call, that idea isn’t the most likely one out there, but it is certainly possible.  If that happens, he loses 20% of his entire portfolio and his investors will be running for the hills!  That’s terrible risk management, plain and simple.

3)  Where there’s smoke, there’s fire

Given the drama that has unfolded, we can be pretty certain that neither of these Wall Street giants are the most ethical guys on the planet, nor the most charitable.  It just goes to show you how careful one must be in this business.  Greed and self-interest can do some nasty things.  Unfortunately, we all need to learn to plan for the worst (aka lawyer up and consider every single possible risk) while hoping for the best.

While I greatly enjoyed the drama that unfolded on CNBC today, hopefully it can also be used to prevent unnecessary risks in your own portfolio or business deals.  You can learn a great deal from the mistakes of others.

PS I’m definitely putting a “shmuck insurance” clause into my next fraternity dues contract.

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4 thoughts on “A Rumble in the Billionaire Jungle

  1. Last December after the presentation Ackman was interviewed by Sorkin on CNBC and Bill was asked question #1. Bill stated that he is in the investment business not the regulatory/compliance business. He wasn’t shy about wanting to profit.

    Unfortunately for Bill the regulatory framework in the U.S.A. makes MLM a legitimate business. My opinion on why MLM has been legal for decades has to do with the fact that 80% of sales for most MLM companies (Amway, Herbalife, etc.) are international.

    The US government figures the benefit of exploiting the international markets out weigh the local negative effects these companies have in the US.

    For example: look at Amway – $12 Billion is sales with 20,000 employees – East Grand Rapids, MI is basically built around company. If the federal government were to deem their business a pyramid scheme then think about the local effect.

    Common sense tells anybody that MLM companies sell the “business opportunity” and not the products, that is Bill Ackman’s precise point. I can tell you one thing if Herbalife and Amway had sales that were 80% from the US market then politicians would most certainly act. For example: why start the war on drugs – well because drugs were destroying local communities and so the government needed to act. We don’t see the destruction that Herbalife and Amway have in the communities of its foreign markets. Guess What? we don’t give a damn. Why? because Herbalife is opening a new plant in NC and creating jobs. Who cares that 80% of their sales are derived from deceiving foreigners. It’s not like they are negatively impacting any US communities. However, shutting these companies down would devastate local US communities were these companies employ and manufacture product.

    The best Bill Ackman could hope for is to get the word out, but even then it will do not good. If you Google “herbalife scam” you get videos of people telling you there is no scam and teaching you how to be successful in the MLM business.

    Herbalife should have stayed private and gone under the radar like Amway. Most people do not know that the son of an Amway founder ran for Governor of Michigan and spent over $40 Million of his own money. Everybody (that watches CNBC at least) has seen that bad spray tan – douche bag Herbalife CEO Michael Johnson and his $90 MILLION income last year.

    • Zach says:

      You raise a perfectly valid point about Herbalife. In fact, I think Icahn would wholeheartedly agree with you. I think the argument against Ackman is that he should have realized this and not put 20% of his entire portfolio (investor’s money) on the bet. There are way too many what if’s that could make his trade go terribly! Frankly, I would never put money into Ackman’s fund and this entire PR stunt/marketing ploy is doing a lot more damage than he expected.

  2. I think reports have stated Ackman is short 20% of the HLF float or $1 Billion. Pershing Square manages $12 Billion, so less than 10% invested in a single investment thesis seems standard in the hedge fund world.

    Herbalife will unravel in the coming years. They are quickly running out of new countries to enter. For pete’s sake they are trying to sell weight loss shakes in Sub-Sahara Africa. Wall street loves their profit margin – when your biggest expense is the CEO’s stock options and not R&D or advertising that has to tell you something.

    Everyone is quick to declare victory for Icahn and Loeb, but I wouldn’t be to premature. It’s a globally connected world – Ackman has the right idea with creating the website. Though I did find really interesting that before I when I googled “herbalife scam” – Ackman’s herbalife facts website would show up in the results – however now it does not.

    Revolutions in the Middle East were started via Facebook and Dictator’s who ruled for decades were ousted. If foreign leaders in Herbalife’s markets get wise to the fact that some US company is exploiting their citizens and not paying them for the pleasure than look out.

    Ackman went short MBIA back in 2002 and the stock collapsed in 2008 – 6+ years. In 2002 & 2003 MBIA was trading between $55-37. By Jan. 2007 the stock was at $72. Bill has done this before – Icahn and Loeb are in it for the short term trade. Shares of HLF are owned 96% by institutions – by putting information and testimonials on the internet about how HLF financially conned the most fragile people in our country is going to make these institutions reconsider their investment. Look at gun companies after the Newton school shootings – Cerberus put the company up for sale the next day – do you think they are going to get fair value? What company with any sort of brand recognition would purchase a gun manufacturer now?

    Having said all of that I do agree with you and Icahn about the threat of a tender offer. But no way its ever for $5 Billion – back in 2007 it was a $2 Billion dollar company. Something along those lines is more realistic which means Bill still mints money.

    • Zach says:

      1) That was my mistake about being short 20% float and not of the entire portfolio. Good catch.

      2) “I don’t want to make any money from this, 100% will go to the Pershing Square Foundation.” – Ackman on his position. Yet he still has a ton to gain from this trade. Notably, bringing up his yearly returns into the double digits. It was also setting up to be great publicity for Pershing Square (until the Icahn drama).

      3) Again, you make a good point and Ackman may very well be right in the mis-valuation of $HLF. I think Icahn made a genius short-term trade to make a quick buck in the process. That said, no matter how right or wrong Ackman is, I’d like to hear your opinion on how he went about publicizing his position and thesis. Frankly, I don’t think what he did was ethical. I haven’t gone through any of the 342 slides of his presentation, but I do know there are several MLM businesses out there ($NUS) which are being greatly affected as well. When you’ve got a $1 billion stake against a company and you’re publicly making the case for it not to exist, that’s bullying. Imagine the kind of precedents these actions will create. I could raise $1 billion for Ringer Capital Management Fund bet against a stock and manipulate its price with my influence and analysis. It just doesn’t seem right or fair.

      4) Speaking of $NUS, look at its chart compared to $HLF. The recent plummet and recovery is almost identical between the two. What makes HLF a pyramid scheme and NUS not? Why should they both trade in the same manner? Could Ackman hedge his bet with a position in NUS? etc. etc. etc. You said yourself in the previous comment that MLM is a legitimate business and is very hard for regulators to take down because of their motives.

      5) I’m just curious why you know so many details about HLF? Do you have a stake in the company or any particular interest in the events going on?

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