by Scott Wapner
Chapman called Ackman’s public short a “circus show” and said he was likely to suffer a short squeeze—a quick jump in a stock price driven by others buying the stock, thus sucking shares out of the marketplace. Ackman had already taken away 20 percent, and if other investors took the other side en masse, he could be forced to “cover his short” (buy the stock), driving up the price at a potentially massive loss.
Chapman figured the government, which had given Herbalife the once-over before, had “been there, done that” and had already moved on. He’d also watched Ackman’s interview with Sorkin on CNBC and was convinced the investor was relying too heavily on regulators to intervene.
Chapman concluded by writing, “Indeed, without the FTC (Federal Trade Commission) taking injunctive actions against Herbalife, Ackman’s crusade toward ‘zero’ is doomed.”
“He’s an opportunistic trader and investor,” Greenberg says of Chapman. “He went so far back in the story and because of that he did have a very interesting perspective on the company.… He saw the wave and the psychology of how things were moving in favor of Herbalife and he was going to be part of that.”
Days later, Chapman said the stock could trade back to the $70s, and that $100 “was not far-fetched.”
The bonfire had started. The only question now was whether Ackman could keep it from spreading.
7
THE POISON PEN
The Chapman and Hempton surprises had certainly created a buzz in the media and hedge-fund circles, but with the extended holiday break in full swing, and most on Wall Street still out of the city on vacation, many observers expected the brewing battle over Herbalife to take something of a hiatus.
It barely lasted a week.
At 12:37 p.m. on January 8, the always provocative business reporter Charles Gasparino tweeted, “Robert Chapman promises ‘big news’ regarding Herbalife sometime today or early tomorrow; possibly lawsuit against Ackman?”1
It was a tempting message for sure, even if no one had a clue what the news was going to be.
One thing was certain—Ackman wasn’t sticking around in New York to find out.
The next morning, on Wednesday, January 9, Ackman made the nearly twenty-minute drive from the Upper West Side of Manhattan to Teterboro, New Jersey, where his private G550 jet was gassed and ready to go at Meridian terminal.
It was a much-needed break, considering Ackman’s endless hours of work on the Herbalife short and the stress and scrutiny that had followed.
Scuba diving in Myanmar would be the perfect remedy, even if it meant a sixteen-and-a-half-hour journey, with a refueling stop, to get there.
Ackman and a group of eight, including an old friend, Leucadia’s Joseph S. Steinberg, some Pershing Square partners, and the British financier Martin E. Franklin, would spend days on a luxury yacht enjoying some of the finest underwater action in the world.
But just before 10 a.m. Eastern time, as Ackman’s jet was settling in for the long haul, his mobile phone blew up with an urgent message from the office.
The news was stunning.
Daniel S. Loeb, the chief executive officer of the hedge fund Third Point LLC, had filed a 13G disclosure form with the Securities and Exchange Commission revealing a massive 8.24 percent stake in Herbalife. Shares spiked 7.54 percent on the news to $41.24 before being halted under the new “circuit breaker” rules at the New York Stock Exchange, which prevent individual stocks from cataclysmic crashes.2
Ackman was blindsided.
Not only were he and Loeb friendly and even occasional investment partners, they were also two of the biggest stars on the hedge-fund scene—the Clooney and Pitt of the profession. Now they’d be trying to rip each other’s heads off.
“This is one of those stories that now becomes perhaps as much about Herbalife and its future, as it does about the hedge fund world and both of these gentlemen,” said CNBC’s Sorkin, who broke into the network’s morning programming to discuss the shocking revelation.3
Though Ackman had always suspected other “longs” could join Hempton and Chapman, he never figured Loeb would be among the opportunists. For one thing, he’d gotten an email from the financier following his Herbalife presentation, congratulating him on his work. Now Loeb was betting $350 million that the same research was a pile of garbage? Ackman was furious and thought it was “a shit move” from a guy he once considered a friend.
Loeb quickly made it clear he was out to win.
After the SEC filing became public, Loeb released a letter he’d sent to his investors. It included a scathing rebuke of Ackman’s thesis, calling it “preposterous.” He wrote:
“The pyramid scheme is a serious accusation that we have studied closely with our advisors.… We do not believe it has merit. The short thesis rests on the notion that the FTC has been asleep at the switch, missed a massive fraud for over three decades, and will shortly awaken (at the behest of hedge fund short seller) to shut down the Company.”4
Loeb also went after Ackman’s presentation at the AXA Center, which had lasted more than three hours, writing:
While the short seller’s presentation was lengthy, it presented no evidence to show that Herbalife has crossed a line that would compel regulators to shut it down. Indeed, there was very little “new” news in the presentation and when pressed in later interviews, even the short seller conceded that the FTC was not looking at Herbalife’s practices. In our experience, expert regulators like those at the FTC do not respond to sudden pressure from hedge fund whistleblowers by acceding blindly to their demands. Finally, even if there were some regulatory intervention that changed how the company does business, we are comforted by the fact that 80% of Herbalife’s revenues come from overseas.5
Loeb made it clear that he had a much different price target for Herbalife’s stock than Ackman, who said it was a zero.
Applying a modest 10–12x earnings multiple suggests Herbalife’s shares are worth $55–$68, offering 40–70% upside from here and making the company a compelling long investment for Third Point.
The letter was about as thorough a “fuck you” as Wall Street had seen in years.
“This is shaping up to be potentially one of the bloodiest hedge fund battles of all time,” Chapman told the Wall Street Journal when news of Loeb’s new position hit.6
It was a battle Chapman had been all too happy to instigate.
Chapman had actually called Loeb, who was vacationing in Cabo San Lucas, Mexico, during Ackman’s presentation, gave him the play-by-play, and told him how far Herbalife shares had fallen. Chapman knew that Loeb still had a long-simmering grudge with Ackman over the Target trade gone wrong. Loeb had intimated that he’d moved on from the disaster, but friends thought otherwise and believed he likely saw Herbalife as a win-win. He could buy the stock and fulfill his fiduciary responsibility to his investors by making money while at the same time sticking it up Ackman’s ass for some long-awaited payback.
Loeb was intrigued enough by the Chapman call that he assigned one of his Third Point analysts to do some cursory work on Herbalife’s business, knowing there was little time to waste. While Herbalife shares were in the high $20s and far down from the pre-Einhorn high of $70, Loeb knew they might not stay there for very long, certainly not the way the stock was being tossed around in the media.
Loeb called his office from Mexico and had his associates immediately hire former FTC lawyers with expertise in the field of multilevel marketing. The goal was clear—to decide whether Herbalife was a pyramid scheme or not and whether an investment and the risk that came with it even made sense.
It didn’t take long for all involved to come to the same conclusion: Ackman was wrong. Convinced that Herbalife shares had been unfairly punished, Loeb started buying the stock at $28.7 He then had to decide how much noise he really wanted to make.
That answer would lie in Los Angeles.
Just after Christmas, Loeb cut short his Mexican holiday and flew up to California to meet face-to-face
with Herbalife’s CEO. Loeb may have had it in for Ackman, but he also knew the guy was no idiot and wanted to cross off any lingering skepticism he had in his own mind about Herbalife’s operations.
“Dan came to my office… and I think he wanted to put the finger on me to see who this guy was and who this company was,” said Johnson.
Like Johnson, Loeb was also into cycling, and since he’d grown up in Los Angeles, the two even knew some of the same people. Johnson spent hours walking Loeb through as much of the business as he could on short notice.
“Everything,” said Johnson of Loeb’s queries. “[He asked about] the business, the legality, the structure, the compensation program, the product. He [Loeb] was highly inquisitive, and he spent a long time here.”
Johnson even gave Loeb an Herbalife cycling kit to wear, jokingly telling him to wear it the next time he biked with Ackman. It was a reference to an unflattering story first documented in a Vanity Fair piece. It had recounted a bike-ride-gone-wrong years earlier between the two that had left Ackman sheepishly overexerted and embarrassed.
It was shortly after the meeting, which Johnson said lasted several hours, that Loeb began loading up on stock. On January 3, 2013, Third Point’s position crossed the 5 percent threshold and triggered the regulatory filing with the SEC, which was done on the 9th.
Johnson was ebullient at the news of Loeb’s filing. If Chapman and Hempton had given Herbalife some breathing room, Loeb had delivered a proverbial haymaker to the naysayers.
“We were looking for allies,” Johnson said. “And to have people going long, when a short is out there—it certainly helps.”
But Loeb wasn’t just any white knight.
Like Einhorn, and even Ackman, for that matter, Loeb was a billionaire with a long and highly respected track record. In 2012, his Third Point Ultra fund was up 33.6 percent, with his main “Offshore Fund” up 21.2 percent, easily beating the market and most of his hedge-fund counterparts. Since its inception in 1995, Third Point’s annualized returns were at least 21.1 percent, net of fees.8
Loeb was one of the best in the game, but it wasn’t the numbers alone that made him one of the industry’s leading men. He was handsome and witty, fit and feisty, and was known as much for his poisonous pen as for his annual performance.
In February 2002, Loeb wrote a scathing letter to the Penn Virginia Corporation, saying of its recent acquisition,
The ill-conceived and poorly timed $112.0 million acquisition of Synergy Oil & Gas (“Synergy”) appears to bode poorly for this management team’s ability to complete accretive corporate transactions.… With all due respect, the sophisticated Texas oilmen that sold their interest in Synergy saw the Appalachian coal men coming with aspirations to wear crocodile skin cowboy boots, silver spurs and ten-gallon hats. No doubt the folks at NGP who sold Synergy so near the top tick of the natural gas bubble had quite a hootenanny at Penn Virginia shareholders’ expense.9
In February 2005, he took aim at Star Gas Partners with this doozy;
“Sadly, your ineptitude is not limited to your failure to communicate with bond and unit holders. A review of your record reveals years of value destruction and strategic blunders which have led us to dub you one of the most dangerous and incompetent executives in America.”10
Even some of America’s most high-profile companies weren’t immune to Loeb’s reach. As an example, on September 8, 2011, it was Yahoo’s turn to face his wrath. In a letter to the company’s board of directors, Loeb announced his arrival. He’d acquired 65 million Yahoo shares, or a 5.1 percent stake in the company, which made him the third-largest outside shareholder.
Yahoo “has been severely damaged—but not irreparably—by poor management and governance,” he wrote to the board.11 It had been a painful few years for the one-time Silicon Valley anchor. In 2008, Yahoo had famously turned down a lucrative $31 per share takeover offer from Microsoft and since then had struggled to remain relevant against newer and more nimble rivals like Google and Facebook.
Just before Loeb came on the scene Yahoo had dumped its CEO, Carol Bartz. Loeb, who started buying the stock when it was near its fifty-two-week low of around $11 a share, made it clear from the outset he expected a say in who got the job next.
Loeb wrote:
Third Point has held discussions with many highly respected entrepreneurial executives active in technology, internet, media and consumer-related businesses. From these discussions we have distilled an All-Star team of potential Director candidates, who would be indispensable in working with the reconstituted Board to pursue the three paths outlined in the recent company announcement: CEO search, business review and strategic options. We look forward to sharing our candidates with you shortly.12
It didn’t take long for Loeb’s patience to run thin.
On November 4, 2011, two months after his initial salvo, Loeb wrote another letter to the Yahoo board, this time taking aim at company founder Jerry Yang. Yang had personally turned down the Microsoft deal, and news reports claimed he was angling for private equity firms to swoop in and save his backside.
Loeb ripped the idea.
We are deeply concerned by news reports that you are considering a leveraged recapitalization that will allow private equity firms to gain substantial equity positions that will, when combined with Jerry Yang’s and David Filo’s ownership, effectively establish a controlling position in Yahoo. More troubling are reports that Mr. Yang is engaging in one-off discussions with private equity firms, presumably because it is in his best personal interests to do so. The Board and the Strategic Committee should not have permitted Mr. Yang to engage in these discussions, particularly given his ineptitude in dealing with the Microsoft negotiations to purchase the Company in 2008; it is now clear that he is simply not aligned with shareholders. At a bare minimum, Mr. Yang must declare whether he is a buyer or a seller—he cannot be both. If we are correct and he is effectively a buyer, corporate ethics require him to recuse himself from any further discussions on behalf of the Company. He should also be requested by the Company to promptly leave the Board and join Mr. Filo in solely an operating capacity.13
Loeb demanded Yang’s resignation and two board seats of his own, and derided Yang’s attempts to cut a “sweetheart deal” with the private equity firms.
Yahoo refused, calling Loeb a short timer, only out for his own interests.
Then, on January 5, 2012, without consulting Loeb, Yahoo announced they’d found Bartz’s replacement. His name was Scott Thompson, a top eBay Inc. executive, known, according to an article that day in the Wall Street Journal, “for his cordial personality and thick Boston accent… a sharp contrast to his predecessor.”14
If investors were excited, they certainly didn’t show it. Yahoo shares closed the day down 3.10 percent, at $15.78 per share.
Loeb wasn’t thrilled either, and on March 28, 2012, he fired off a letter to Thompson directly that hardly sounded like a detente. Loeb was now demanding four board seats, including one for himself, and slammed back against accusations he was a drive-by investor.
“At the risk of beating a dead horse,” Loeb wrote, “we suppose that, by the Board’s analysis, it would have been this dreaded ‘short-term’ thinking to have allowed Microsoft’s $31 per share offer four years ago to be presented to shareholders. To the contrary, an unbiased observer might find Third Point’s thinking quite ‘additive.’ Third Point has been a driving force standing up for shareholders since we disclosed our position in Company shares in September.”15
Blood was in the water, and it was about to become a feeding frenzy.
On Thursday, May 3, in yet another letter to the board, Loeb dropped a bomb—alleging that Thompson had padded his resume with a degree in computer science he never earned. Loeb demanded Thompson’s firing, by noon the following Monday.16
Yahoo confirmed the allegation, but said Thompson’s error was “inadvertent.”17
The facts were hardly on his side.
While Tho
mpson had gone to Stonehill College, near Boston, he graduated in 1979 with a bachelor of science in accounting, not computer science. And according to a report from allthingsd reporter Kara Swisher, the bogus degree had been listed on Thompson’s bios over the previous ten years.
Loeb had seen enough and pushed the board to send Thompson packing and welcome his own slate of directors. In another missive sent to Yahoo and publicly released, Loeb wrote:
We urge the Board to stop wasting valuable company resources and drop its resistance to placing the Third Point nominees on the Board.… We are prepared to join immediately. Once on the Board, our first tasks will be to work with the remaining Board members to find Yahoo! a new leader with the qualifications and integrity to lead the Company and install best practices of corporate governance. The Company can ill afford to continue this misguided fight with its largest outside shareholder while it has so many other fires to put out. There has been enough damage already.
Eleven days later, Thompson, who’d been irreparably damaged by the embellishment, resigned.18
That same day, Loeb and Yahoo settled, with the financier getting three board seats: one for himself and one each for Harry Wilson, the CEO of the restructuring firm Maeva, and Michael Wolf, CEO of the media consulting firm Activate. Yahoo insider Ross Levinsohn was made interim CEO, while the board engaged in a formal search process for Thompson’s successor.
On July 17, 2012, Yahoo named Google star, thirty-seven-year old Marissa Mayer, CEO. Mayer promptly exclaimed, “Yahoo is a terrific company with an amazing following, terrific brand and huge amount of potential.”19
Yahoo shares rose 2 percent to $15.96 on the news, with investors betting the revolving door of CEOs had finally stopped spinning.20
Loeb had scored big again.
