The Battle Over Herbalife: Bill Ackman vs. Carl Icahn

This Feb. 6, 2012, photo shows Bill Ackman of Pershing Square Capital Management in Toronto. Chairman of Canadian Pacific Ltd
This Feb. 6, 2012, photo shows Bill Ackman of Pershing Square Capital Management in Toronto. Chairman of Canadian Pacific Ltd. John Cleghorn is publicly demanding a retraction and apology from Ackman, the New York-based fund manager who is leading a shareholder revolt against CP's current leadership. (AP Photo/The Canadian Press, Pawel Dwulit)

During this brief lull in the drama surrounding the nutritional
company Herbalife, it's time to reflect on the drama within the drama:
the battle between Bill Ackman and Carl Icahn, who have staked out
opposing positions in the stock.

And upon reflection, here's hoping that they both lose. Yes, these guys
make good theatre, particularly when they're slinging insults on live
TV, but as investors weigh who to believe and of course how to trade
Herbalife, they should weigh the following: both Icahn and Ackman
are among the most conflicted and at times unctuous characters in

Even worse, their little grudge match is shedding little if any real
daylight on a serious issue, namely whether Herbalife given its
controversial business model is worth its current share price, or
something far less.

Ackman, as most people on Wall Street know by now, thinks Herbalife is a
pyramid scheme that will eventually run out of cash once its
distributor base dries up.

Initially I was tempted to agree with Ackman for the simple reason
that as a consumer of health food and an occasional protein shake, I
don't believe any company can make a lot of money selling this stuff.
In other words, it had to be what Ackman pegged a "fraud" to sustain
the level of profits the company boasts.

But then I realized that Ackman has a strange definition of fraud. He
basically said the same thing about bond insurer MBIA, which he shorted
with similar fanfare back in 2002, and six years later, the company's
sham balance sheet and underwriting standards finally emerged.

OK, but if what Ackman was saying about MBIA was so accurate, why did
it take six years? Modern markets just don't work that way. In fact,
when you peel back Ackman's direct criticisms of MBIA at the time he
made them, some of them were spot on (namely how MBIA was venturing
into risking areas such as insuring bonds backed by subprime
mortgages) but most of them were way overblown, which is why even when
the firm was blowing up during the 2008 financial crisis, it was hard
to take what he was saying seriously.

And if Herbalife is such a fraud, why do we need Bill Ackman to tell
us? This guy makes it sound like he discovered gold, when in fact he
used publicly available information, spun it through a research
report and leaked his "exclusive" findings to a few gullible
reporters when he announced his short late last year. Like I said, if
Herbalife is such a scam, my bet is that we wouldn't be hearing about
it now, and not from someone like Ackman.

That doesn't mean Herbalife is a great company, in fact, it isn't. It's
a desperate company selling a commoditized product, which is the only
reason why it is embracing someone as slimy as Carl Icahn.

Herbalife's "white knight" may have stemmed the slide in its stock
once Ackman began his assault by taking his 15.5 percent stake in the
company (he's now the largest single shareholder) but that's not
because he thinks Herbalife is a great company or he's become a
devotee of its protein shakes.

If you don't believe me, listen to his commentary about the company.
It usually goes over the head of the talking heads who interview him
that Icahn doesn't have a clue about Herbalife's products or the
strength of management. In fact, Icahn spends most of his time telling
investors for the umpteenth time how much he hates Ackman, who
apparently out sleazed him on a business deal a couple years ago.

All of which would be good news if that were the real reason Icahn is
in the stock, but I suspect it's not. Icahn is no long-term investor
looking for under-valued gems in the market à la Warren Buffett. The
77-year-old former "greenmailer" made his name attaching himself to
mergers during the 1980s boom and quickly cashing out after he forced
corporate boards to buy out his stake at a higher price.

New regulations are said to make greenmail more difficult, so now
Icahn considers himself an "activist" investor -- which means he has to
hold onto his stake just a bit longer before jawboning management to
pay him out.

Icahn's stake in Herbalife comes with two board seats, which means
essentially that Herbalife is sleeping with someone who has and will
screw just about anyone. I am told the company meets with him
regularly, as does its main financial adviser, Ken Moelis. Publicly,
it's all peachy. "Herbalife stands by Mr. Icahn's investment in the
company, and appreciate his shared viewed of Herbalife's operations,
products and future products," a company flack said in a statement to

Privately, the people at Herbalife will tell you that Icahn is at best
a necessary evil to fend off Ackman as long as they can. They have no
idea how long he plans to be in the stock, or whether he really
believes in the company. The only thing they do know is he's in this
trade for a quick and profitable ride, like he is with just about
everything else he does.

So in the battle of the scumbags, who should we be rooting for? It's
kind of like the Russians fighting the Germans during World War II
because you want them both to lose.