The Battle for Herbalife (NYSE:HLF) just heated up.
Q. Who said the following?
Bill Ackman is a "slick salesman who does not know much about insurance and certainly doesn't know much about restructuring secure debt"
If you said Carl Icahn you are incorrect.
The previous statement was made by Mr. Martin Whitman - octogenarian and Chairman of Third Avenue Funds Inc.
During the financial crisis, Bill Ackman was short MBIA. Mr. Whitman took a large long position in MBIA and Ambac after the stocks dropped in the crisis and after Mr. Ackman revealed his short. Not only was Mr. Whitman determined to state that MBIA was worth $35 per share, but he also made particular efforts to insult Mr. Ackman's research efforts and intelligence.
This article on Dealbook summarizes some of Mr. Whitman's arguments.
What can we learn from this history?
1) Both parties were convinced they were correct.
2) Both parties took significant stakes in the company in question/backed-up their trades.
3) In the end, only Mr. Ackman was left standing.
Ackman covered his short at a hat size. Whitman was left to explain to his unitholders why he had lost so much capital.
Carl Icahn is no dummy. You don't make the kind of money he has made by being a lemming. No doubt the language he has chosen to employ in his 13D is designed to trigger a Short Squeeze in HLF stock. The threat of a "take private" transaction is certainly ominous if one is short HLF common. A takeover could trigger a price as high as $75 a share. This would put Ackman's investors in the poor house quickly. Based upon the after hours action in the stock, so far so good.
But, those who assume that Mr. Icahn will automatically be correct and/or influential should not forget about Mr. Whitman's equally damaging comments about Mr. Ackman's research on MBIA.
Of particular note, Mr. Ackman researched HLF for over a year, hired the best law firms in the country, and concluded that HLF is a pyramid scheme. Mr. Icahn's regulatory filing reveals that he started buying HLF stock the day Mr. Ackman made his short position public. This doesn't exactly inspire confidence that a tremendous amount of due diligence was completed before the buy orders started to flow.
Mr. Icahn obviously doesn't like Mr. Ackman. Is it possible that his contempt for the man may cloud his judgment or at least alter his observational bias on HLF? Or, does he see something that Mr. Ackman has missed?
Time will tell.
My own individual analysis of Herbalife's business model and representations leads me to conclude that HLF and its distributors mislead potential recruits as to the potential of the business opportunity. Specifically, I think the company and its recruiters make fraudulent statements to prospective distributors and the churn within the salesforce is a problem for the business in the future.
Specifically, if you aren't a Supervisor in HLF's salesforce then there's absolutely no way for you to make any money as a retailer at all because so much product is being sold at 25-35% off. Visit herbawell.com if you don't believe me.
Mr. Icahn clearly disagrees.
Seemingly this game will be over when HLF goes private and/or regulators intervene in Herbalife's business plan.
One way or another somebody will be right and somebody will have a lot of egg on their face.
Undoubtedly regulators are examining HLF behind the scenes. Today, Mr. Icahn launched a surprise announcement after the market closed.
Might the SEC or FTC be the next party with a surprise of their own?
For those who automatically assume that Mr. Icahn and Mr. Loeb must be right all I can say is:
Don't forget what happened to Mr. Whitman in 2008. Seemingly the young gun outdueled the wiley veteran. Will history repeat itself or not?
Wall St. will be watching.