‘Ottawa’ Weird Investing Tale of the Week: Carl Icahn Tries to Sell His Herbalife Shares — to Bill Ackman
This Friday’s special treat: lessons from Carl Icahn on how to bury the news and stick it to your frenemy.
The Wall Street Journal had a curious headline this morning stating that Icahn, the billionaire hedge fund manager, mulled selling his roughly US$1 billion Herbalife stake to a group that included Bill Ackman, whose hedge fund Pershing Square Capital Management is short the stock. The Ackman bit is what really got people’s attention, as it implied he may be backing down from his thesis that Herbalife, a seller of nutritional supplements and weight-loss shakes, is an illegal business that should be shut down. But the real news is the fact that Icahn wants out of Herbalife.
The two have been engaged in a long, very expensive, often times entertaining debate as to whether Herbalife is a legitimate, undervalued business…or a pyramid scheme worth nothing. Herbalife had a US$5.8 billion market value as of Thursday.
Ackman scored a small, pyrrhic victory when the Federal Trade Commission determined in July that Herbalife had, in fact, done some shady things. Pyrrhic because the FTC only ordered a US$200 million slap-on-the-wrist fine, not closure of the company as Ackman hoped for, and the stock rose on the news.
Herbalife shares were up 16 per cent this year through Thursday, after a 42 per cent gain in 2015. With news of Icahn potentially planning to wind down his Herbalife position, the shares fell about 7 per cent Friday morning.
We still may not have the complete story, but as of now it seems that Icahn wanted to get out of Herbalife and the investment bank Jefferies Group offered a portion of the stake to Ackman to cover part of Ackman’s short bet and, essentially, make him look foolish. Ackman hasn’t needed any help in that — he’s done it on his own the past year, particularly with his bet-gone-wrong (but he’s sticking to it!) at embattled drugmaker Valeant Pharmaceuticals.
Herbalife may have turned into a game of chicken — who was going to get out first? But it’s just another example of hedge fund managers letting their egos get in the way of smart investing. Icahn may truly believe Herbalife is a good company, but the stock has had a nice run and he’s had his fun with Ackman. Surely he can find better uses than having that money in tied up this company.
As for Ackman, at some point he probably needs to just close the books on this Herbalife trade and move on. It’s been years, and even if he’s fundamentally right, his fund isn’t in a position to be going on moral crusades if they can’t make money. Pershing Square’s publicly traded vehicle has dropped 40 per cent in the past 12 months. He has a duty to investors and they can’t be happy right now.