They are two of the richest and most prominent
hedge fund managers in Manhattan.
About the same age and athletic build, they favor
brash, headline-grabbing investments. They make the rounds in New York
charity circles. They live blocks apart in luxury buildings on the Upper
West Side. They spend summers not far from each other in mansions in the
Hamptons.
Yet, they find themselves locked in a battle over,
of all things, a nutritional supplements company that makes protein bars
and energy shakes.
One of the hedge fund managers, William Ackman,
claims that the company,
Herbalife, is a house of cards — “the best-managed pyramid scheme in
the history of the world” — and its stock is worth nothing. His rival and
friend, Daniel S. Loeb, takes the opposite stance, arguing that Herbalife
will not only survive, but thrive.
Their fight played out on a public stage on
Wednesday, when Mr. Loeb disclosed that his investment firm Third Point
had bought nearly nine million shares of Herbalife, now worth more than
$350 million. Just weeks before, Mr. Ackman of Pershing Square Capital
excoriated the company at an investment conference, betting $1 billion
that the stock would fall in what is known as a short sale.
This is a “battle bigger than any sumo pairing,”
said Jeffrey A. Sonnenfeld, a senior associate dean at Yale School of
Management.
A spokeswoman for Herbalife declined to comment.
Their dispute centers on the company’s sales
practices. Herbalife relies on an army of independent resellers who have
incentive to recruit other members.
Mr. Ackman, 46, has taken aim at this network of
resellers, saying that the recruitment efforts are more lucrative than the
product sales. He also suggested that the company uses predatory practices
to attract undereducated minorities with false promises of becoming
millionaires.
Citing the 32-year history of Herbalife, Mr. Loeb,
51, called the short-seller’s thesis “preposterous.” He defended the
company as a “compounder,” one that grows steadily year over year with a
loyal clientele.
Madeleine Albright, the former secretary of state, has extolled the
virtues of its product.
Jack
Cusano/Reuters
William A. Ackman, chief of Pershing Square Capital Management.
Adding to the scrutiny, the
Securities and Exchange Commission has opened an investigation into
the company, according to a person briefed on the matter who spoke on the
condition of anonymity because the inquiry was continuing. The agency has
not decided whether to take action and Herbalife has not been accused of
any wrongdoing.
Mr. Ackman and Mr. Loeb are similar figures on
Wall Street.
Over the last decade, Mr. Ackman and Mr. Loeb have
developed a reputation for their aggressive tactics, capitalizing on their
rock-star status in finance to gain support for their strategies. Unlike
many of their hedge fund compatriots, the activist investors are unafraid
to take big positions in companies and demand change in very public ways.
They overhaul management teams, remake boards and
dictate strategy, all in the hope of increasing their holdings. Or they
just bet against a stock, if they don’t have faith.
Last year, Mr. Loeb was instrumental in the ouster
of the
Yahoo chief executive Scott Thompson. The activist investor, known for
his acerbic pen, wrote scathing letters to the board of the Internet
company, detailing how Mr. Thompson had padded his résumé.
“Now more than ever Yahoo investors need a
trustworthy C.E.O,” Mr. Loeb wrote at the time. Since the firm first took
a stake in 2011, shares of Yahoo are up more than 50 percent.
Mr. Ackman turned a $60 million investment in
General Growth Properties into a $2.3 billion windfall by navigating one
of the nation’s largest mall operators through bankruptcy. After taking a
seat on the board, he successfully fended off a lowball takeover attempt
while orchestrating a better deal.
They are not always successful. Mr. Ackman took on
Target, battling with the retailer’s board in 2009 over how to improve
its stock price. After spending millions of dollars on his campaign, he
conceded defeat.
He is also bullish on a turnaround at
J. C. Penney, bringing in the former Apple retail chief Ron Johnson.
But since his first investment in late 2010, Penney’s stock has fallen 31
percent.
During the financial crisis, Mr. Loeb’s firm
suffered along with many of his peers. His main fund lost about 33 percent
in 2008.
Only one investor will be right on Herbalife.
In late December, Mr. Ackman announced an
“enormous” short position in the company, in a three-hour presentation
called “Who Wants to Be a Millionaire?” The investor cast doubt on the
company’s sales of nearly $4 billion a year.
“I don’t think very many retail sales are actually
happening at all,” said Mr. Ackman, who pledged to donate his personal
proceeds from the bet against Herbalife to charity.
With his usual showmanship, Mr. Ackman also
highlighted what he considered the more dubious aspects of the company’s
culture. He showed an Herbalife video, featuring a tour of a distributor’s
high-end home.
“Episodes of ‘MTV
Cribs’?” Mr. Ackman asked. “No. These are Herbalife productions.”
In the end, the short-seller had a bold
prediction: federal regulators would eventually shut down the company.
The investor’s statements sent the stock tumbling.
Over the next four days, shares of Herbalife fell 30 percent. Months
before, critical questions on a company’s earnings call by the activist
investor David Einhorn prompted a similar sell-off, although the stock had
started to recover before Mr. Ackman’s presentation.
Soon after Mr. Ackman’s campaign began, Mr. Loeb
met with the company executives and bankers about Herbalife’s business,
according to people with direct knowledge of the matter. He also conducted
his own research, digging through the numbers.
The investor eventually decided Mr. Ackman was
wrong, buying 8.2 percent of Herbalife. When Mr. Loeb disclosed the stake,
he breathed life in the stock. It rose 4 percent on Wednesday to close at
nearly $40, higher than when Mr. Ackman delivered his presentation.
Mr. Loeb indicated in a letter to investors that
the shares had room to run, given the company’s strong revenue, profit and
free cash flow. Over all, he estimates Herbalife stock is worth as much as
$68.
“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,” Mr. Loeb wrote, taking
a shot at Mr. Ackman. Mr. Ackman promptly responded, welcoming any
investor who “brings additional sunlight to the situation.”
On Thursday, Herbalife will tell its side of the
story. The company will present to investors its first public rebuttal
since Mr. Ackman’s attack last month.
Ben Protess and William Alden contributed
reporting.
A version of this article
appeared in print on 01/10/2013, on page A1 of the NewYork edition with
the headline: Just Business: 2 Rivals Clash, Billion in Play.
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