Pershing Square

Yesterday Carl Icahn filed a 13D disclosing a ~13% synthetic stake in Herbalife. There are three possible reasons that Carl Icahn might want to own half a billion dollars worth of Herbalife stock:

  • as a value investment in a company with strong cash flows and a beaten-up stock price,
  • as a toehold in preparation for launching a tender offer to take the company private, or
  • to fuck with Bill Ackman.

If you watched Icahn and Ackman square off on CNBC, or read the transcript, or witnessed some sort of dramatic recreation of it, I think you’ll join me in assuming it’s sheer fuck-with-ery. “Cry, Jewish boy, cry!,” he probably said as he signed the 13D. But who knows? He’s up $80+ million as of this morning, so two birds with one stone.

A curiosity of this position is that it’s mostly synthetic: Icahn owns about 2.5 million actual shares and about 11.5 million call options. Like so:

As we’ve discussed before, this is Icahn’s standard M.O., and it’s not because his dealers are dummies who will sell him levered upside on a stock that he can move with just a lift of his magnificent eyebrows. Read more »

If you have an opinion on whether Carl Icahn or Bill Ackman got the better of today’s amazing CNBC shoutfest over Herbalife, you have a number of options for expressing it. We’ve had like four posts so, y’know, comment away, but if you want something more formal both CNBC and Business Insider have polls you can vote on. Also if you listen to CNBC’s video you can hear in the background a bunch of men who, when not oohing and ahhing over cursing on television, spend their days running around pretending to trade stocks. Don’t be fooled, though: you can actually trade stocks, even Herbalife’s. If Icahn-Ackmania changed your view of Ackman’s short thesis on Herbalife, feel free to express that changed view with money.

As of 4pm-ish, BI and CNBC both give Ackman the win. Mr. Market goes the other way, though without overwhelming enthusiasm.1

This makes sense – as a former high school debate judge I’d score this one for Ackman too. On style alone: Icahn apparently did his interview in a zen garden surrounded by a team of silent and efficient researchers; Icahn prepped by going to a Queens schoolyard and getting in fights.

But on substance, too. Icahn’s main claim, that shorting a company and then saying mean things about it is “manipulation” or otherwise bad form, is sort of crazy; Ackman’s zen researchers helped him point out that Icahn did just that at Ira Sohn in 2003. More important, though: how does Icahn’s “you can be short, but you can’t tell anyone” thesis – as he says, “If you’re short, you go short and hey, if it goes down you make money” – hold up when applied to long investing? Read more »

When Mark Hughs founded a multi-level marketing company called Herbalife in 1980, he probably thought it had the power to do a lot of things. Help people lose weight. Makes others rich. Shake up the diet industry. What he mostly likely did not expect, however, was that his li’l company that could would reignite a feud between two billionaires that would devolve into a flurry of press releases quibbling over who was dying to be friends with whom, shouting matches on live TV, and, we predict, someone telling someone else he has a right mind to “Rip the eyes out of your head and piss into your dead skull! You messed with the wrong hedge fund manager!” Read more »

As many of you know, around these parts we are constantly debating the merits of various financial services employees’ food eating challenges. Historically, we’ve detracted points for allowing the participants far too much time to complete the task at hand (opening bell to close, might as well just make it limitless), an insufficient volume of food (a box of Munchkins, considered by many to be a snack), and lack of originality (vending machine challenges have been done). On the flip side, we’ve applauded creativity (an investment banker and 500 Starburst enter a room and there’s a webcam involved),* obscene amounts of food and enough sugar to cause hyperglycemia (244 oysters, a cupcake of death), and topicality (the delicacy that is the Sausage Pancake Bite: yes! Double Downs: double yes!).

Which brings us to this: the Herbalife Food Eating Challenge. New York Observer reporter Patrick Clark noticed that while the Herbalife story has been covered by many an angle so far (the blood-sucking pyramid scheme angle, the grandma angle, the Dan Loeb/UWS hedge fund manager on UWS hedge fund manager angle), the most important angle of all had yet to be explored: the actual ingesting of this stuff angle. Read more »

An important truism in the financial markets is that there’s no such thing as a “toxic asset,” tout court; everything is toxic/dangerous/Bad at some (high) price and attractive/safe/Good at some other (much lower) price and there’s a wide area in between where things mostly live and you fight about their pricing. You can apply that insight to junk bonds or CLOs or really any number of things, and you should, but today it’s sort of fun to apply it to Herbalife. As far as I can tell the argument over Herbalife goes something like this:

Herbalife opponents: Herbalife is a horrible pyramid scheme that preys on disenfranchised, mostly poor and minority people and convinces them to part with their life savings through misleading advertising and high-pressure sales techniques.
Herbalife supporters: True! And … ?
Opponents: And therefore it will be shut down by the FTC and the stock will go to zero.
Supporters: That’s … wow, that’s just hopelessly naive. I’m gonna go buy some HLF.

Today CNBC’s Herb Greenberg has a good statement of the “horrible pyramid scheme” case, which of course has been most memorably taken up by Bill Ackman, who is betting a billion dollars on “shut down by the FTC and go to zero.” And last week Bronte Capital’s John Hempton gave the classic statement of the “hopelessly naive” case.1 As one Herbalife shareholder put it when I asked if he thinks HLF is a pyramid scheme, “in the colloquial sense, yes; in the legal sense, no.”2

Here’s how another Herbalife shareholder put it today: Read more »

Well, the praise was brief but extravagant, specifically “this is the best managed pyramid scheme in the history of the world,” which I at least would be proud to have on my resume, but I might be in the minority there. What do you think Ackman’s goal was in this morning’s 340-slide, nineteen-hour Herbalife presentation featuring phrases like “Shane’s going to come up here and talk about the accounting again” and “now I’m going to bring on our lawyer for the next 200 slides” and “here’s where it gets really interesting: shipping and handling,” and, at the 2 hour 28 minute mark, “feel free to go to the men’s room, ladies’ room, it’s at the top of the stairs, but I’ll keep going”?1 Ackman thanks several team members for working tirelessly for a year or more on this presentation, and if you watched all of it you have a pretty good sense of how they must have felt.

One model of this fight is that Ackman and Herbalife are attempting to wage regulatory battle by proxy. Presumably some SEC and FTC lawyers are watching this and the respective hopes are:

  • Ackman hopes that the Federal Trade Commission will conclude that Herbalife is a pyramid scheme and shut it down, bringing the stock to zero-ish and making him a zillion dollars on his short position, and
  • Herbalife hopes that the SEC will conclude that Pershing Square is a market-manipulation scheme and shut it down, causing HLF’s stock to soar.2

Neither, either, or both of these things could happen, I suppose; the FTC and the SEC are their own dogs and so you could have each running around investigating one of the protagonists here. But generally relying on a regulator is sort of a dicey proposition; even if you’re right, the regulator may have better, or possibly worse, things to do with its time than inflicting pain on your adversaries. So what does that leave you? Read more »

What is the best line from Herbalife CEO Michael Johnson’s amazingly hostile call with CNBC this afternoon, in which he maintained that Bill Ackman is wrong that Herbalife is a pyramid scheme? I think the two leading contenders are:

  • “Mr. Ackman’s proposition that the United States would be better when Herbalife is gone? The United States will be better when Bill Ackman is gone.”
  • “Our customers are sometimes called distributors. That’s the only confusion that we have.”

Oh that’s the only confusion is it? That’s … confusing. “You’re a pyramid scheme; you only sell products to your distributors.” “No we’re not, we sell real products to real customers.” “Oh.” “But we call the customers distributors.” I’m looking forward to a confusing exchange of press releases.1

Johnson’s claim is that the whole presentation, and the leak thereof to CNBC, are about market manipulation: “an extraordinary number of puts” on HLF are due to expire this Friday, he claims, and Ackman’s presentation tomorrow is designed to basically juice those puts going into expiry (and, one might add, year-end). That … I mean, sure, whatever.2 Read more »