There’s some hot hedge-fund-titan-on-hedge-fund-titan action in the stock market today over the nutrition supplement company Herbalife. A few weeks after one well-known big shot—Bill Ackman—made an impressive and lengthy case for shorting the stock, another equally-well-known investor—Dan Loeb—has gone long.
Who will win? Our money is on the middle-aged, gray-haired Ivy League educated, activist hedge-fund manager with a long record of taking big stakes in large companies and high-profile charitable contributions.
Last month, Bill Ackman, the head of Pershing Square Capital, gave an 300-plus slide presentation at an investors' conference where he declared a short bet, worth nearly $1 billion, on Herbalife, the multilevel marketing nutritional supplement company. After disclosing his massive bet against the company, which began in May, 2012, Ackman called Herbalife a pyramid scheme in a CNBC interview.
Ackman’s core claim was that the distributors of Herbalife products got more money by selling to other distributors, whose end-sales they get a cut of, than from selling to consumers who actually use the products. Also, Ackman argued, Herbalife distributing wasn’t a good deal for the overwhelming majority of distributors, meaning the company would eventually collapse as it became clear that distributing the products was not a money-making proposition. He told Bloomberg News this Monday that “Once you realize that this is about promoting a business…it becomes very clear that it’s a pyramid scheme.”
The stock dropped more than 30 percent after Ackman disclosed his investment thesis, dropping from just over $40 on Dec. 19 to just under $25 on the morning of Dec. 24. Herbalife CEO Michael Johnson responded in a blustery interview, in which he threatened legal action against Ackman for stock manipulation. The company has promised that on Thursday it will rebut Ackman’s charges in a presentation to investors and analysts.
This morning, however, Herbalife received a giant vote of confidence, from Dan Loeb, the head of Third Point, who bought 8.9 million shares, an 8.24 percent stake in the company. On Jan. 3, when Third Point acquired its stake, Herbalife’s stock opened at $32.46, meaning Loeb’s fund spend somewhere in the neighborhood of $290 million on its buy. Ackman, in comparison, has disclosed that his short is worth upward of $1 billion. At the end of last year, two less prominent hedge-fund managers disclosed big long bets on Herbalife’s stock.
While it is common for hedge-funders to get in on the same side of a single big bet on a company, up or down, this type of public, fund-on-fund action is rather rare. It’s especially noteworthy because both Loeb and Ackman are not primarily known as short sellers —i.e. firms whose main strategy is to bet that a company’s value will fall. (Of course, one of Ackman’s most famous investment was a big bet in 2002 against the bond insurer MBIA.
While it is common for hedge-funders to get in on the same side of a single big bet on a company, up or down, this type of public, fund-on-fund action is rather rare.
Rather, both Loeb and Ackman are vocal value and activist investors. Ackman and Loeb tend to make large investments in big, well-known companies and then try to improve their performance once they become financially involved. In July, Ackman bought some $2 billion of Procter & Gamble stock. He’s also a board member of JCPenney, where he recruited Apple retail guru Ron Johnson to take over the company.
Where Ackman is actively, and positively, involved in the management of the companies he buys large stakes in, Loeb is famous for taking a slightly different tack. He buys large stakes in companies and then lambastes and embarrasses the current management in public until he gets his way, the CEO resigns, and he can more effectively influence the company from its board.
In a May 2012 letter that Loeb wrote to Yahoo’s then-CEO Scott Thompson, he accused Thompson of faking his biography, saying that Thompson actually had an accounting degree from Stonehill College when Thompson claimed to have a computer science degree. Thompson resigned 10 days later and Loeb was able to get three of his proposed nominees on Yahoo’s board, including himself. In a 2005 letter to the CEO of the technology vendor InterCept, Loeb said that John Collins and a board member, Glen Strum, “could potentially be tooling around in a luxurious business jet, possibly sipping Cristal Champagne cocktails at shareholder expense.” In that same letter, Loeb also said that “a substantial majority of the revenues” for one line of business “were derived from processing charges for adult pornography sites.”
Both Ackman and Loeb have acquired massive personal fortunes. They’re only five years apart (Ackman, 46, and Loeb, 51), and their adventures in the Manhattan real-estate market are themselves news stories. To a degree, they occupy similar space in the modern culture of Wall Street.
But in the case of Herbalife, they’re on opposite sides of a binary equation. Ackman is betting that the company’s structure is so fragile it will collapse under market or regulatory pressure; Loeb believes that Ackman’s efforts at running down the stock have left room for value investors. As this plays out, we shouldn’t expect any acid letters or nasty spats over the composition of the company’s board. Instead, just kick back and watch two of Manhattan’s most prominent hedge funders face off in gladiatorial battle. CNBC will keep score.