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Pershing Square Capital Management's Bill Ackman Dialing Back War On Herbalife

Summary

Five years ago, Bill Ackman announced a $1 billion short position in Herbalife stock.

His efforts to get the federal government to drive the company into bankruptcy has proven to be failure.

Perhaps it is time for Ackman to end the war and let the company operate free from interference.

Through the entire Bill Ackman-Herbalife saga – through the 2-hour slide show in 2012 when he announced his $1 billion short position in Herbalife and intention to drive it into the ground, the Federal Trade Commission investigation he convinced his friends in Congress to undertake, the company being declared in compliance with all federal laws, one question has remained unanswered: Why?

Why won’t Ackman let go?

He said at first Herbalife was a scheme that preyed on its “distributors” and ought to be forced out of business. The $1 billion was invested to ensure the good guys prevailed and the bad guys went broke.

Rather than accept what he called “blood money,” Ackman pledged to donate any profits from the venture to charity. He spent $50 million on lawyers and the Global Strategy Group, a public affairs firm, to organize and press the opposition to Herbalife.

ABC News reported Ackman paid a “whistleblower” $3.6 million over 10 years to dig up dirt on Herbalife.

Ackman badgered Senator Ed Market of Massachusetts to get the FTC to investigate in hopes it would declare the business illegal, shut it down and possibly jail its executives.

The FTC did fine Herbalife and order some reforms, which the company has enacted, but it since has more than once declared Herbalife and legal business.

The FTC ordered Herbalife to “fundamentally restructure its business so that participants are rewarded for what they sell, not how many people they recruit” – the seeming core of Ackman’s complaint. But the firm reported last May that 90 percent of its sales now were directly to end users – comfortably above the 80 percent called for in the agreement with the FTC.

So: Mission accomplished for Ackman, right? Any pretense the company was operating as a scheme is gone, as certified by the government. Herbalife even says the exercise in documenting the sales to end users has enabled it to improve knowledge of its customer base and better target and market its products. Its stock is at about $82 per share, up almost $20 over the last year.

Ackman has forced the company to address the weakness. But its profits mean losses for him. He has restructured the investment into outright put positions to limit the damage to Pershing Square Management, his venture capital fund that had to lay off 10 employees recently because of poor performance.

So why not just fold and move on? Chris Versace at The Street offered a plausible guess. “For some investors, the hardest thing to do is throw in the towel when the position continues to move against you,” he wrote. “The prudent move is to check, re-check and even triple check the underlying thesis by collecting and assessing data points to make sure the investment thesis remains intact, strengthened or waned. As much as we would like to think it does remain intact, that is not always the case.” 

Vanity – “the inability to admit that we were wrong, did not see what was really going on or missed something” can cause “emotion – and perhaps the desire to be right” – to take over.

If not vanity, perhaps Carl Icahn is the reason Ackman can’t let this go. It was five years ago last week that Ackman, who was betting on Herbalife to fail, clashed with Icahn, who is still heavily invested in its success, traded insults on a CNBC program.

“This is not an honest guy,” Ackman said of Icahn. “This is not a guy who keeps his word. This is a guy who takes advantage of little people.”

Icahn responded that Ackman had invested in the “mother of all short squeezes” and said Ackman had “one of the worst reputations on Wall Street” and was a “crybaby in the schoolyard.”

There was a kumbaya moment at a dinner two years later, but Icahn now has 20 percent of Herbalife and five seats on its board, and Ackman still has his huge loser of an investment.

Perhaps it is time he let it go. It doesn’t look like Herbalife is going to come crashing down anytime soon.