When the Wolves Bite

by Scott Wapner

  He also addressed what he termed “positive developments” at Valeant. Pershing’s holdings of Valeant stock remained a significant weight on the firm’s performance.

  Ackman also announced a new “long-term incentive program” at Pershing to overhaul the way employees were being compensated. It was a way to maintain talent by rewarding long-standing employees with something other than a share of the firm’s net profits.

  “We recognize that the recent period had been a difficult one for our investors,” Ackman wrote. “We are extremely appreciative of your support and patience.”

  In March 2017, Ackman had finally lost his own patience with Valeant, selling his entire stake of 27.2 million shares for a $3 billion loss. The investment would go down as one of the worst losses in hedge-fund history. Ackman said the investment—and the stunning loss—deeply affected him and those who relied on his decision making.

  “Number one, I don’t like losing money, but even worse is losing other people’s money. You lose money yourself you feel like a jerk. You lose other people’s money you feel way worse,” he said. “I’ve never experienced anything like this. This was a significant moment, and it just makes me that much more motivated and vigilant. In this business you have to stay incredibly vigilant. The most successful people I know, every one of them had a moment. It’s hard to think of a successful investor who hasn’t had a major moment. You hope never to have it. This was mine.”

  Ackman, whose assets under management had sagged to $11 billion from a high of near $20 billion in 2015, says redemption requests among his firm’s clients have been “basically normal,” with the real fallout from his public losses coming via his ability to attract new investors and their hard-earned dollars.

  In some ways, Bill Ackman has once again become a “show me” story; he appears to have accepted that. And while he now seems more introspective than I can remember, genuinely moved by the Valeant disaster and its impact on his employees, the firm, and his own reputation, Ackman’s signature confidence hasn’t waned or wavered. He says he believes he’ll stage an epic comeback to prove everyone writing his obituary wrong.

  “The life expectancy of a hedge fund is probably three years,” Ackman said. “We’ve been in business now for thirteen years, and Buffett, the best, has been around for fifty years, so we’re still early. We’re in inning two and a half. The key is learning from your mistakes. I’ve had very difficult moments before. I had a very difficult moment in 2002 when we were short MBIA and the stock was going up every day, the company was all over us, and they convinced Spitzer to investigate us. That was a tough moment, and I said at the time this is a great experience. I will learn a lot from this. And I launched Pershing after that. We’re going to come back. We’ll be fine.”

  Michael Johnson is also looking ahead. He retired from Herbalife in June 2017 after twelve years. At one last gathering before his departure, twelve hundred of the company’s distributors traveled to Charlotte, North Carolina, to raise money for the Herbalife Foundation. They brought in $1.6 million, with part of the evening serving as a tribute to Johnson’s tenure and stewardship.

  Johnson’s team played a video during dinner set to the Andra Day anthem, “Rise Up.” It depicted Johnson’s journey and the challenges of the last many years. As tears welled in the eyes of the faithful, Johnson walked onto the stage, overcome with emotion and barely able to speak. He had taken Herbalife to a place that once seemed unthinkable, while managing to outlast one of the more formidable threats any corporate executive has ever had to encounter.

  He’d come face-to-face with some of Wall Street’s most ferocious wolves, and survived.

  CODA: BIG THOUGHTS

  Bill Ackman and Carl Icahn’s war over Herbalife, which amazingly still rages, leaves many important questions, not the least of which is, who won?

  While history’s scorecard—and, for that matter, Wall Street’s—will show that Carl Icahn got the better of Bill Ackman in this round, identifying a true victor proves much more complicated. There’s no doubt that Icahn has profited handsomely from his investment in Herbalife. Perhaps you could say that Herbalife’s legions of loyal shareholders are better off given the stock’s rise, but what lives have truly been improved? Could all that money have been spent elsewhere, especially money from two men whose philanthropic endeavors are a key part of their personal fabrics?

  Then there’s the impact on Herbalife itself—its employees, customers, and contractors worldwide.

  Though the government stopped short of shutting the company down, as Ackman would have liked, does it mean that he was entirely wrong in his assessment of the business? Herbalife is undoubtedly a different company than it was prior to the settlement with the FTC. Changing the business model was no doubt disruptive. Revenues fell by around 5 percent in 2017 and earnings declined in tandem, perhaps evidence that meeting the new guidelines won’t be easy. Herbalife is no longer the hyper-growth business it once was, though some believe the company’s challenges are beginning to stabilize and that even better days are ahead. It’s been in business for thirty-plus years, has millions of loyalists around the global, and has truly changed some people’s lives for the better. Still, some bears on Wall Street argue that Herbalife’s comeuppance is coming sooner or later. Time will tell.

  I’m often asked what I think—is Herbalife a legitimate business or not? My answer is undoubtedly more nuanced than some of you would like. I genuinely believe that the company has changed from its swashbuckling early years and that it has real customers around the world who use its products because they like them. Some do buy the shakes and teas and other things to make a little money on the side or to share with friends. I know because I met them and talked to them and heard their stories firsthand. At the same time, it’s also possible that some people might still be using recruitment alone as their motivation to make money, preying on the naive. More broadly, I do often wonder what the lasting impact of this epic battle will be on the investment community as a whole. When pondering this question, I go back to what one famous hedge-fund manager told me in the hours that followed the now infamous brawl between Icahn and Ackman.

  Late in the evening on January 25, 2013, when I finally had a chance to lie down and consider what had taken place only a handful of clock turns earlier, I emailed this particular person and asked who they thought had won.

  The answer I got was striking and, frankly, unexpected.

  “They both lost,” he said, referring to the unflattering spotlight the episode was likely to shine on the business itself and ultimately on its deep-pocketed participants.

  The bigger issue—perhaps far greater than what specifically happens to Herbalife from here forward—is the impact activist investors will have on our corporate culture in the decades ahead. Most of today’s so-called Master Class of activists undoubtedly do good work, improving the businesses they’ve targeted and bringing a basket of fresh ideas into the boardroom. Still, it’s unclear who actually benefits beyond the shareholders of these companies and the activists themselves. Do employees reap their own rewards throughout the hard-fought corporate struggle? A BuzzFeed News story that covered the fallout from another high-profile activist campaign cited a study from a few years ago that critics might say casts doubt on that question. According to a 2013 paper titled “The Real Effects of Hedge Fund Activism: Productivity, Asset Allocation, and Industry Concentration,” “employees of target firms experience a reduction in work hours and stagnation in wages despite an increase in labor productivity.”1 In other words, some experts say, while the activist investor may in fact cause positive changes that improve a company’s performance, the actual rank-and-file employee may not feel those changes in their own experience.

  Herbalife’s shareholders have clearly done well, as the stock has remained resilient. Only the years ahead will decide whether there’s a lasting taint on the business itself, one that employees will have to live with.

  Good food for thought as
we wonder who and where the so-called wolves will bite next.

  ADDENDUM

  On November 1, 2017, nearly five years after first going public with his $1 billion Herbalife short, Bill Ackman revealed during a live television interview on CNBC that he had modified the structure of his position once again in what some observers said was one step closer to closing out the embattled position once and for all. Ackman said he had converted the stake into put options, which would still pay off if the stock collapsed, but would eliminate the risk of being “squeezed” by Carl Icahn. “There’s been a perception that Pershing Square will have to cover our position, and we’ve just taken that way,” Ackman told me during a phone conversation following his TV appearance. But while Ackman may have inched toward the finish line, he made it clear that he wasn’t ready to concede defeat. Ackman said his thesis on the company hadn’t changed one bit, but that the circumstances around the investment had. “We still think it’s a good investment,” he said. “The fundamentals are deteriorating. They’re actually getting worse, but the stock won’t go down.”

  The truth is that Herbalife was no longer worth Ackman’s time or money. He’d been busy on a new investment in his portfolio—one he’d hoped would make a splash and help spark a comeback. In August 2017, Ackman revealed an 8.3 percent stake in payroll processor Automatic Data Processing Inc., hoping to shake up the company and grab seats on the board of directors. Ackman waged a bitter proxy fight with the $50 billion company, but in a vote on November 7, 2017, at the annual meeting, shareholders sided with management.

  That same week, Ackman also declared that he would never speak publicly about Herbalife again.

  ACKNOWLEDGMENTS

  Where to begin? I’m indebted to so many people who helped transform this dream into a reality. First and foremost, thank you to my amazing editor, Benjamin Adams, and the entire team at PublicAffairs for taking a chance on an unknown, unproven author. Risks aren’t easy to take and I’m forever grateful that you were willing. Of course, none of this would have been possible without CNBC and the incredible platform CEO Mark Hoffman and Senior Vice President of Business News Nikhil Deogun have given me. Thank you for believing in me and all that the Halftime Report could be. Nik, your support, mentorship and unwavering commitment to strong journalism drives me. A special thanks to CNBC Executive Vice President, Public Relations, Brian Steel for supporting this project and for your friendship. Halftime Report Executive Producer Jason Gewirtz is this book’s unsung hero for his willingness to read every word and critique them along the way. Thank you to CNBC Senior Producer Patricia Martell for the tireless hours she suffered through between the FOIA requests and critical research I needed done to make this happen. This book literally would not have happened without the quick thinking of Max Meyers, John Melloy, Lydia Thew, and my entire show team in the CNBC control room, on the day of the Icahn-Ackman brawl in 2013. I’d also like to thank my good friend and author, Mark Rotella, for sharing his own wisdom about the book writing process. Mark—it was invaluable advice! I owe so much to my team at United Talent Agency, most especially, my book agent, Marc Gerald, for “getting” this story before I even walked into his office. I couldn’t have written this without his tutelage and guidance. How many pitch drafts did we go through? Thank you as well to UTA’s Jay Sures for making that initial phone call over coffee that got this whole thing started in the first place. Thanks to UTA’s Adam Leibner for his career guidance and excitement over this project. I’m especially grateful to my friend Michael Ovitz for his sage advice over the years including prodding me to step up and write a book. OK, Michael, now what? Finally, and most important, I am forever thankful to my wife, Nancy Han, a truly great and dedicated journalist and devoted mother of our two fabulous boys. Thank you for being my rock and always pushing me to do something big! Last but certainly not least—love to Dylan and Cameron, the two sweetest boys any daddy could ask for. Nancy, Dylan and Cameron: Your unconditional love and endless enthusiasm about the big project I was working on helped push me forward, especially in the toughest and most trying moments. And thank you boys for asking me more times than I can remember, “Daddy, what if you don’t finish the book?” At least now we don’t have to worry about that!

  NOTES

  Introduction: The Masters of the Universe

  1. Leo E. Strine Jr., “Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System,” Yale Law Journal, April 2017.

  2. Jeffrey Sonnenfeld, “Activist Shareholders, Sluggist Performance,” Wall Street Journal, April 1, 2015.

  Chapter 2: The Pitch

  1. William Cohan, “Is Bill Ackman Toast?,” Vanity Fair, Oct. 17, 2016, www.vanityfair.com/news/2016/10/is-bill-ackman-toast; Gretchen Morgenson and Geraldine Fabrikant, “A Rescue Ploy Now Haunts a Hedge Fund That Had It All,” New York Times, Jan. 19, 2003.

  2. Gotham Partners, “Is MBIA Triple A?,” December 9, 2002.

  3. Joe Nocera, “Short Seller Sinks Teeth into Insurer,” New York Times, Dec. 1, 2007.

  4. Ian McDonald and Kara Scannell, “MBIA Accord Caught in SEC Delay,” Wall Street Journal, May 22, 2006.

  5. Katie Benner, “Bond Giant’s $8.1 Billion Surprise,” Fortune, Dec. 20, 2007, archive.fortune.com/2007/12/20/news/companies/benner_mbia.fortune/index.htm.

  6. Larry Doyle, “Are Student Loans an Impending Bubble? Is Higher Education a Scam?: Part II,” Business Insider, June 22, 2011.

  7. Roger Parloff, “The Siege of Herbalife,” Fortune, Sept. 9, 2015, fortune.com/2015/09/09/the-siege-of-herbalife; FTC, “In the Matter of Koscot Interplanetary,” Docket 8888, November 18, 1975.

  8. FTC, “In the Matter of Koscot Interplanetary,” Docket 8888, November 18, 1975.

  9. Grant Gross, “Burn Lounge Promoter Settles FTC Complaint,” PCWorld, July 1, 2008, www.pcworld.com/article/147810/article.html.

  10. Brian Louis, “Ackman’s General Growth Sales Marks End of Investment Era,” Bloomberg, Feb. 11, 2014, www.bloomberg.com/news/articles/2014-02-11/ackman-s-general-growth-sale-marks-end-of-investment-era.

  11. Christine Richard and Diane Schulman, “Herbalife Investigative Work,” Feb. 22, 2012.

  12. “A European Court Rules: ‘Herbalife Is an Illegal Pyramid Scheme,’” Pyramid Scheme Alert, Jan. 5, 2012.

  13. Richard and Schulman, “Herbalife Investigative Work.”

  Chapter 3: The Activist

  1 William D. Cohan, “The Big Short War,” Vanity Fair, April 2013, www.vanityfair.com/news/2013/04/bill-ackman-dan-loeb-herbalife.

  2. Antoine Gara, “Baby Buffett: Will Bill Ackman Resurrect the Ghost of Howard Hughes and Build a Corporate Empire?” Forbes, May 6, 2015, www.forbes.com/sites/antoinegara/2015/05/06/bill-ackman-baby-buffett-howard-hughes.

  3. Brett D. Fromson, “The Rookies’ Big Score,” Washington Post, July 10, 1994.

  4. Cohan, “The Big Short War.”

  5. Fromson, “The Rookies Big Score.”

  6. Ibid.

  7. Ibid.

  8. Ibid.

  9. Ibid.

  10. Gara, “Baby Buffett.”

  11. Stephanie Strom, “Rockefeller Center Trust Gets New Plan,” New York Times, September 29, 1995.

  12. Ibid.

  13. Gara, “Baby Buffett.”

  14. Linette Lopez, “Bill Ackman Is Acting a Lot Like He Did the Last Time He Blew Up a Hedge Fund,” Business Insider, March 16, 2016.

  15. Jonathan R. Laing, “Meet Mr. Pressure,” Barron’s, December 5, 2005.

  16. Gretchen Morgenson and Geraldine Fabrikant, “A Rescue Ploy Now Haunts a Hedge Fund That Had It All,” New York Times, January 19, 2003.

  17. Ibid.

  18. Deposition by Attorney General, State of New York, of William Ackman In re Gotham Partners Investigation, May 28, 2003.

  19. Morgenson and Fabrikant, “A Rescue Ploy.”

  20. Ibid.

  21. Gotham Partners Management, “A Recommendation for Pre-Paid Legal S
ervices, Inc.,” November 19, 2002.

  22. Deposition by Attorney General, May 28, 2003.

  23. Morgenson and Fabrikant, “A Rescue Ploy.”

  24. Deposition by Attorney General, May 28, 2003.

  25. Ibid.

  26. Ibid.

  27. Ibid.

  28. Ibid.

  29. Unit Purchase Agreement by Gotham Partners and High River Limited Partnership, March 1, 2003.

  30. Carl Icahn, “Icahn Unit Announces Proposal for Acquisition of Hallwood Realty Partners, L.P. at $222 Million,” July 29, 2003.

  31. Azam Ahmed, “Two Wall Street Titans, and a Seven-Year Tiff,” New York Times, November 26, 2011.

  32. David Benoit, “Icahn: Au, Contraire I Never Wanted to Be Ackman’s Friend,” Wall Street Journal, January 25, 2013.

  33. Ahmed, “Two Wall Street Titans.”

  34. Ibid.

  35. Ian Austen, “Wendy’s Moving to Spin Off Its Canadian Doughnut Chain,” New York Times, July 30, 2005.

  36. Ibid.

  37. Deborah Brewster, “Ackman Sells Off McDonald’s Stake,” Financial Times, December 6, 2007.

  38. Parija B. Kavilanz, “Hedge Fund Takes Aim at Target,” CNN Money, July 16, 2007.

  39. Ibid.

  40. Jennifer Reingold, “Taking Aim at Target,” Fortune, May 28, 2009.

  41. Ibid.

  42. Jackie Crosby, “Shareholders: Target 4, Ackman 0,” Star Tribune, May 29, 2009.

  43. Heidi N. Moore, “Bill Ackman to Hedge-Fund Investors: ‘I Neglected to Apologize,’” Wall Street Journal, February 9, 2009.

  44. Joseph Guinto, “Who Wrecked JC Penney?,” D Magazine, November 2013.