Billionaire investor Carl Icahn has emerged victorious in the three-year war with hedge fund manager Bill Ackman over Herbalife.
Icahn is long the stock and Ackman is short.
On Friday, the Wall Street Journal first reported that the Federal Trade Commission and Herbalife would announce a settlement. The company is expected to pay a $200 million fine and importantly it won’t be determined a “pyramid scheme.”
“The FTC settlement announced today, coming after a two-year investigation also concluded that Herbalife is not a pyramid scheme – a conclusion that obviously vindicates our research and conviction,” Icahn said. “While Bill Ackman and I are on friendly terms, we have agreed to disagree (vehemently) on this subject. Simply stated the shorts have been completely wrong on Herbalife.”
Herbalife’s stock (HLF) surged to a new 52-week high on the news. The stock was last trading around $64.
In December 2012, Ackman, the founder of Pershing Square Capital, publicly announced that he was short $1 billion worth of Herbalife, a multilevel marketer that sells nutritional shakes and supplements.
During a three-hour long, 342-slide presentation, Ackman described the company a “pyramid scheme” that preys upon poor people, particularly from minority populations. His investment was predicated on regulators, specifically the FTC, shutting the company down.
Herbalife has always denied Ackman’s allegations. The FTC opened its investigation in March 2014.
Icahn, who had been feuding with Ackman for years, disagreed with his rival’s thesis and piled on by going long the stock in early 2013.
While Ackman was being interviewed on CNBC, Icahn telephoned into the show and started hurling insults on live television, calling Ackman a “crybaby in a schoolyard” and adding that Ackman is “the quintessential example of if you want a friend on Wall Street, get a dog.” He also said that Ackman would be the victim of the “mother of all short squeezes.”
The two titans had been feuding since 2003 over a deal they made involving Hallwood Realty when Ackman was running his first hedge fund, Gotham Partners.
They have since made up and are on friendly terms, but they still disagreed on Herbalife.
After the news of the settlement broke, Icahn released a statement that he had increased his stake from 25% of the shares to 34.99% outstanding. Icahn has made hundreds of millions on his investment, while Ackman has lost hundreds of millions.
In the statement, he made a subtle dig at Ackman.
“A significant part of my investment success is directly tied to our in-depth investment research and understanding of often complex and unique issues facing companies. One can be sure that this was the case with Herbalife where we spent considerable time and resources studying the false pyramid scheme accusations made against the Company. Unlike many of those that ‘shorted’ Herbalife, we did not rely on one or two research papers prepared by non-experts,” Icahn wrote.
Icahn’s comments seem to be a reference to how Ackman got the Herbalife idea. It was a former Bloomberg News reporter-turned-researcher, Christine Richard, who gave Ackman the idea. Richard wrote the book “Confidence Game” that chronicles Ackman’s famed MBIA short.
A Pershing Square rep did not comment.
Here’s Icahn’s full statement:
I have always believed in Herbalife’s strong fundamentals and am pleased the Board has decided to increase my ownership limit from 25% to 34.99% of the Company’s outstanding shares. A significant part of my investment success is directly tied to our in-depth investment research and understanding of often complex and unique issues facing companies. One can be sure that this was the case with Herbalife where we spent considerable time and resources studying the false pyramid scheme accusations made against the Company. Unlike many of those that “shorted” Herbalife, we did not rely on one or two research papers prepared by non-experts. As a result of our research, over three years ago we concluded that Herbalife was not a pyramid scheme. The FTC settlement announced today, coming after a two-year investigation also concluded that Herbalife is not a pyramid scheme – a conclusion that obviously vindicates our research and conviction. While Bill Ackman and I are on friendly terms, we have agreed to disagree (vehemently) on this subject. Simply stated the shorts have been completely wrong on Herbalife. Now that the Company has reached a settlement with the FTC, it is time to consider a range of strategic opportunities, including potential roll-ups involving competitors, as well as other strategic transactions.
I have the greatest confidence in Herbalife’s CEO, Michael Johnson, and the entire management team, who have skillfully led the Company through adversity, including holding firm against a high-profile PR campaign against the Company by Bill Ackman where it was alleged more than once that the Company would be shut down. Obviously, we are still here. I genuinely commend management’s steadfastness in the face of short sellers desperate to rally a bear raid based on false accusations. The short-sellers should also note that since joining the Board three years ago, we have paid attention to their accusations and while the vast majority have been baseless, a handful of their points were valid and the Company has made appropriate changes. Interestingly, ending and modifying certain practices has not hurt earnings one iota.
Herbalife produces some of the finest nutrition products in the world and its direct sales model gives people an opportunity, either full- or part-time, to start their own business. Without the Herbalife sales opportunity many of these people would be unemployed or otherwise have a difficult time finding work. In my teens I spent several summers working as a Fuller Brush man going door to door often working 12 hours per day. I ended up earning more during the summer than my father. Many of my friends who also started with me but were not willing to work as hard failed as salesmen. But no one would believe their failure made Fuller Brush a “bad” company. Fuller Brush, much like Herbalife, provided many people with potential income opportunities where such opportunities may not have otherwise existed. Just because not everyone can be successful selling Herbalife products does not mean Herbalife is a “bad” company.” I believe that now the cloud over Herbalife is gone, the Company will continue to grow and continue to provide much needed employment for many more hard-working people.”
Julia La Roche is a finance reporter at Yahoo Finance.