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.