Book Review: When the Wolves Bite

“I wouldn’t do business with you if you were the last man on Earth.” So said billionaire Carl Icahn on live television to fellow billionaire Bill Ackman.

On January 25, 2013, for 27 riveting minutes of uninterrupted television, world financial markets came to a halt as two of the wealthiest men on the planet tore into each other. It was great TV.

The brawl was vicious, personal and highly entertaining. The supposed subject of their discussion was an unlikely one: Herbalife, a nutritional-supplements company. On its prospects, they viscerally disagreed; Icahn was long and Ackman was short.

Typically, portfolio managers speak in measured tones. Not this time. These two men loathed each other, and they weren’t shy about expressing it. Naturally, Wall Street loved it. During the segment, trading volume dropped 20%.

Coolly presiding over the mayhem was CNBC anchor Scott Wapner, who details the full story in his fun and engaging new book, “When the Wolves Bite: Two Billionaires, One Company and an Epic Wall Street Battle.”

Here’s the TV segment. If anything, Wapner downplays the zaniness. As the insults started to fly, you can hear traders hooting in the background. At one point, Wapner has to remind Icahn, a billionaire 20 times over, that “bullshit” is inappropriate for cable TV.

Wapner explains how the Ackman/Icahn kerfuffle long predated their on-air brawl. Years earlier, Ackman felt Icahn had screwed him out of millions in a stock deal, and the courts agreed. Icahn, the cantor’s son from Queens, didn’t take the loss well. “I couldn’t figure out if he was the most sanctimonious guy I ever met in my life or the most arrogant.”

Despite their feud, or perhaps driving it, the two men aren’t terribly dissimilar. They’re both rich, very smart and incredibly driven. Both are also “activist investors,” which is the new, more respectable name for “corporate raiders.”

Ackman made his name by shorting MBIA, the mortgage insurer. He chose right and made a fortune. Icahn, whose voice still carries the pugnacity of his native Queens, is a legendary investor. Five years ago, the cover of Time magazine labeled Icahn the “Master of the Universe.”

The story picks up speed in 2012, when Ackman and his Pershing Square hedge fund decide to take a $1 billion short position in Herbalife, the multilevel marketing company. Under the leadership of their ebullient CEO Michael O. Johnson, Herbalife sold diet shakes and teas, mostly to Hispanic customers. Like many MLM firms, the strategy was to get to new people to sign on as distributors who then had to buy more products. The new distributors were then encouraged to sign on still more distributors.

This left the question, “Were Herbalife’s sales real, or were they just selling to their own distributers?” In May 2012, before Ackman initiated his short, the stock got pummeled after David Einhorn queried management on precisely this topic. They fumbled their answer, and Wall Street’s judgment was brutal. The next day, shares of Herbalife plunged 40%.

On balance, history suggests that Herbalife is indeed a legitimate enterprise, if perhaps an unseemly one. But Ackman’s thesis was that the whole thing was a sham and a Ponzi Scheme. He used the media and an investor conference to relentlessly criticize Herbalife. That’s what irritated Icahn. He objected to Ackman’s bear-raid tactic of taking an outsized short position and then scaring the bejesus out of everyone. In response, Ackman accused Icahn of using the same tactics.

Wapner is a skilled storyteller, and the book has its tragicomic moments. By 2014, the battle started to turn against Ackman. At one investor conference, Ackman slammed Harbalife for more than two hours, and the shares soared 25% that day. Herbalife was so creeped out by Ackman’s obsession that they commissioned a psychological evaluation of him, looking at his desires and motivations, the same way the FBI profiles serial murderers.

“This guy Ackman,” to quote Icahn, seemed possessed. The more he lost, the more defiant he became. He even compared Herbalife’s evasions to the Nazis’ “big lie.” As Herbalife rallied, Icahn increased his already massive fortune, but causing Ackman pain seemed the greater reward.

One of the more disquieting details in the book is the way big investors manipulate the media. In fact, Ackman was able to marshal much of the political system against Herbalife. Apparently, if you have enough cash to spend, it doesn’t seem terribly difficult to weaponize social justice in the cause of your portfolio. I have to wonder where else this dynamic exists.

The judgment of Wall Street is clear: shares of Herbalife are up more than 64% so far this year. As entertaining as the Herbalife story is, it’s also just baffling. What drove these men? Why was Ackman so darn relentless? Why did he short Herbalife after Einhorn gave it such a haircut? It’s odd that a battle over a nutritional-supplements company is tinged with Greek drama. When egos are in play, all the money in the world isn’t enough.

Posted by on May 10th, 2018 at 10:31 am


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