By Scott Wapner
Read by Scott Wapner
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With their billions of dollars and their business savvy, activist investors Carl Icahn and Bill Ackman have the ability to move markets with the flick of a wrist. But what happens when they run into the one thing in business they can’t control: each other?
This fast-paced book tells the story of the clash of these two titans over Herbalife, a nutritional supplement company whose business model Ackman questioned. Icahn decided to vouch for them, and the dispute became a years-long feud, complete with secret backroom deals, public accusations, billions of dollars in stock trades, and one dramatic insult war on live television. Wapner, who hosted that memorable TV show, has gained unprecedented access to all the players and unravels this remarkable war of egos, showing the extreme measures the participants were willing to take.
When the Wolves Bite is both a rollicking, entertaining read–a great business story of money and power and pride.
This book would not have happened without the gracious cooperation of the three major parties involved in this story—Carl Icahn, Bill Ackman, and, of course, Herbalife’s now former CEO, Michael Johnson. All agreed to speak on the record about their roles. Some of the events depicted have not been reported until now, a testament to the commitment each of the players, and others, made to the integrity of the story. In some places, you’ll notice direct quotes that were taken from the many hours of interviews I conducted with each participant. In other instances, quotes or specific events and dates are utilized from the overwhelming amount of information available from public sources; these are thus footnoted. Other facts are taken from direct conversations with the key parties or those close to the story. I’m grateful for their support of this project.
INTRODUCTION: THE MASTERS OF THE UNIVERSE
Not since the Rockefellers and Vanderbilts has one group of investors exerted more influence on Wall Street than does the current class of financiers known as shareholder activists.
This class of super-investors, which includes Carl C. Icahn, William A. Ackman, Daniel S. Loeb, Nelson Peltz, and others, is defined by an interest not just in owning a piece of a company, but also in using their influence and money to change the way it operates. And no company, large or small, is beyond their reach. Apple, PepsiCo, Yahoo, DuPont, JC Penney, and Macy’s are among the businesses that have been targeted in recent years.
While the 1970s and 1980s marked the rise, dominance, and ultimate fall of the corporate raiders, arbitrageurs, and junk bond kings of the day, during the current Era of the Activist, barely a week goes by without one of the aforementioned financiers revealing a stake in a company’s stock and an ambitious plan to propel it higher.
Activism isn’t just proliferating—it’s exploding.
In 2012 there were seventy-one activist campaigns with a total of $12 billion invested, according to the new regulatory filings with the Securities and Exchange Commission. By 2015 the numbers had surged to eighty-three filings totaling nearly $31 billion and counting. As the number of dollars has grown, so has the size of the targets, with the average market caps of their companies increasing from more than $2.3 billion in 2012 to nearly $6 billion in 2015.
As a finance reporter, this exclusive, iconoclastic world is an obsession for me. It has been ever since January 25, 2013, when Icahn and Ackman engaged in a wild, intensely personal war of words on live television and brought Wall Street trading to a sudden standstill.
Consider the moment: Here were two billionaires hurling insults while the world watched and trading stopped. CEOs from Davos to Dallas dropped what they were doing to watch it. It was a moment in time—organic, bizarre, and completely unplanned. I should know—I was hosting the live TV show when it happened.
The rise of shareholder activism and the power of these new Masters of the Universe are equally as stunning. Ten years ago, activist hedge funds had less than $12 billion under management. Today, it’s more than $120 billion, with more than ten funds now managing more than $10 billion each.
Why? Some cite the ongoing bull market—the raging rally of stocks since post-crisis 2008—as the catalyst. Companies were flush with cash and could borrow it at record low interest rates, and shareholders were hungry for a bigger piece of that pie. Enter the shareholder activist to get it for them, typically using a familiar playbook—usually a spin-off, share-buyback, or cost-cutting initiative—always in the name of unlocking more value for all shareholders.
There is also a case to be made that activism as a technique has become popular because in many cases it has worked. Big investors with big ideas and big names driving share prices higher while forcing CEOs to maximize returns for their shareholders—or else.
The activist aggregator, 13D Monitor, found that between 2006 and 2011 the average one-day “bump” for a stock once an activist had revealed their position was 2.65 percent, with the average return over fifteen months reaching 15.24 percent, dramatically outperforming the payout of the S&P 500 over the same time frame.
But do those gains come at a cost?
Leo E. Strine, the influential Chief Justice for the Delaware Supreme Court, wrote about activist hedge funds in February 2017’s Yale Law Journal in his 133-page paper titled “Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System.” “There is less reason to think (activists) are making the economy much more efficient, and more reason to be concerned that they are perhaps pushing steady societal wealth on a riskier course that has no substantial long-term upside,” he suggested.
Distinguishing between so-called human investors—those of us who save for college or retirement—and the “wolf packs” of activist hedge funds who attempt to instill change in a corporation, Strine argued,
What is commonly accepted about activist hedge funds is that they do not originally invest in companies they like and only become active when they become dissatisfied with the corporation’s management or business plan. Rather, activists identify companies and take an equity position in them only when they have identified a way to change the corporation’s operations in a manner that the hedge fund believes will cause its stock price to rise. The rise that most hedge funds seek must occur within a relatively short time period, because many activist hedge funds have historically retained their position for only one to two years at most.1
Judge Strine is not alone in his criticism of the perceived short-term nature of activists. Jeffrey A. Sonnenfeld, Senior Associate Dean of Leadership Studies at the Yale School of Management, argues that “too often activists pressure companies to cut costs, add debt, sell divisions and increase share repurchases, rather than invest in jobs, R&D and growth,” and that any value created by activists is “often short-lived and sometimes comes at the expense of long-term success, if not survival.”2
Others lament the activist class’s herd mentality—too much money chasing too few good ideas. Laurence D. Fink, the noted and outspoken CEO of the world’s largest asset manager, Blackrock, decries the quick-fix approach as damaging to the corporate structure at large. In February 2016, in a letter sent to hundreds of chief executives, he urged them to focus on “long-term value creation” rather than on buybacks and other initiatives.
The famed corporate lawyer Martin Lipton, known as the creator of the “poison pill” defense tool, designed to protect a company from a hostile takeover, would declare that hedge-fund activists are ruining America, rather than helping it. But even Mr. Lipton would certainly attest that there’s no denying the rock-star status these activist investors have achieved, mostly for their methods, but sometimes as much for their madness—their noise and provided platforms.
Never was that more apparent than in the years-long public battle over Herbalife, which began on a cold December day in 2012 and rages on to this day. This is the inside story of how it all went down—the fights, the factions, the money, and the mayhem of an epic Wall Street war.
Herbalife Chief Executive Officer Michael O. Johnson had been waiting for weeks, hoping its arrival would help unmask the man who had threatened to destroy him. It was spring 2014, and the most closely followed multilevel marketing company on Earth was under siege.
For the better part of eighteen months, Wall Street’s resident rock star, the hedge-fund manager William A. Ackman of Pershing Square Capital Management, had waged war against the company, burning through tens of millions of dollars of his firm’s own money, with no end in sight.
Ackman was tactical and tenacious, driven and determined, at times even obsessive in his torment, yet to the executive who’d spent the bulk of his time bobbing and weaving to avoid the onslaught, Ackman was, at the same time, bewildering.
What drove him to attack so viciously, Johnson often wondered. What really made Ackman tick?
One Sunday afternoon three weeks into May, some of that suspense was finally about to end, with the delivery of a document so sensitive its mere existence would be kept a secret until this writing. Even some of Herbalife’s most senior leaders were initially kept from viewing it.
The thirty-page workup read like something out of a spy novel, but it wasn’t a work of fiction. It was an in-depth psychological profile of Ackman himself, the kind the FBI might do when chasing a hardened criminal. The secret dossier titled “Preliminary Report on Bill Ackman” described an adversary who was “fiercely competitive” and “extremely smart,” fueled by ambition and a quest to win at all costs.
Herbalife’s vice president of global security, Jana Monroe, had commissioned the effort with one goal in mind—to get inside Ackman’s head, to uncover the who and why, his methods and motivation.
“My assessment early on was that he was going to be in this for the long haul,” Monroe said of the report’s critical findings. She was “looking at his attacks on the company and figuring out where they might go so that we could be preemptive rather than reactive.”
Monroe had spent thirty years in law enforcement, including more than twenty inside the Federal Bureau of Investigation. Five of those years were in the elite serial crime unit called the National Center for the Analysis of Violent Crime, in Quantico, Virginia. A real-life Clarice Starling, Monroe was on the teams investigating serial killers Ted Bundy and Jeffrey Dahmer, was an early reader of the Unabomber’s notorious manifesto, and knew penetrating Ackman’s mind would help the company understand the threat it was facing.
“It was clear (from the report) that this was someone who wears his competitiveness on his sleeve—it’s not just business, it’s personal, it’s me. I’m the one who knows how to make the right investments,” said Monroe.
The report was prepared by Dr. Park Dietz, one of the nation’s leading forensic psychiatrists, a man who has spent decades profiling evil—from serial killers and stranglers to stalkers and school shooters.
Dietz had never met Ackman before, but the Herbalife affair reminded him of the Tylenol tampering case from the 1980s and the incidents that followed—in particular one involving a man who shorted shares of a drug manufacturer then phoned in a hoax to drive the stock price lower.
“Part of what interested me was the resemblance to a case that had fascinated me decades earlier,” Dietz said. “I always thought that was an interesting kind of crime.”
But Dietz knew getting deep into Ackman’s psyche would be difficult.
Unlike most of his prior cases, he couldn’t interview his subject and would instead have to scour the internet for old stories and television clips in order to study the major events of Ackman’s life.
“Most of it was journalistic,” Dietz said. “It was whatever was available—trying to look at his biography, the major newsworthy events and how he’d reacted to prior wins and losses. The task is to try and learn their life story with the available data and look for patterns in the behavior of that person in the life span.”
Over dozens of highly descriptive pages, the document, which took nearly six weeks to prepare and cost Herbalife around $100,000 to commission, dissected Ackman and the characteristics that have made him the most famous financier on Wall Street—his history and tendencies, priorities and psychology.
It described a man “aggressive and competitive in all things,” with a “grandiose sense of self” who “craves association with other ‘special’ people and institutions.”
“Greed would be an accurate descriptor,” it read, “but only because the number of digits followed by a dollar sign is a metric by which he measures his place in the world and expects others to measure him.” The document described Ackman as a person who “requires constant admiration, adulation and publicity,” who “uses publicists and other contacts to shape and control press reports; chases celebrity and sees himself as a celebrity whose image is to be shaped and tailored by those loyal to him.”
“My basic view was that he saw Herbalife as a target that offered him the potential to reap rewards for his investors while appearing to be a crusader for the downtrodden,” said Dietz.
“To me, he didn’t seem to have much personal awareness,” said Monroe of her own research. “His performances weren’t very convincing.”
Line by line, the document tore Ackman open, depicting a merciless megalomaniac who “uses philanthropy to deflect critics” and is “inclined to arrogant, haughty, disdainful, condescending, patronizing behavior and attitudes that he seeks to mask.” Ackman, it said, “blames others for his defeats and mistakes” and “looks for loopholes in the law and ethics that he can exploit.”
It threw shade on Ackman’s uncanny resiliency, saying he “believes he is in the right and stubbornly, inflexibly, sticks to his position.” He is “very controlling,” it read, “and believes he can do most things better than anyone else in the room.”
Another paragraph attacked Ackman’s ability to deal with defeat, saying he is “very sensitive to criticism and failure, which causes shame, humiliation, and rage, producing long-remembered ‘injuries,’ but he always seems to have a bigger quest lined up to take his mind off the pain and distract others from the shame.”
The report concluded with the following passage:
Ackman’s public persona is an illusion manufactured to project onto a large screen his fantasies of unlimited success. As long as the public accepts the illusion, he can function, but he experiences any and all criticism or resistance as a threat to expose the insecure boy behind the curtain. He has no capacity to manage the feeling of shame that this creates, and he reacts to the feeling with rage.
By some measure, the document confirmed what Herbalife had believed from the beginning, but Johnson and his team thought building a more complete composite of the enemy would help determine the best way to fight back—what flanks to cover and how to manage the campaign.
“We were trying to determine what his motivation was,” said Herbalife’s chief financial officer, John DeSimone. “How we could get through this and what the endgame might be. We didn’t know who Bill Ackman was—the man—the tactics and the strategy he might employ.”
But beyond laying out a portrait of the enemy, the document also defined a road map for Herbalife to follow should the situation with Ackman suddenly—and dramatically—change.
Under the headline “Strategic Priorities,” it advised Herbalife executives to “keep open a door to genuine alliance” with ground rules “closely negotiated.”
“If a path to engagement opens,” it advised, “appeal to Ackman’s charitable persona by shifting his focus away from Herbalife’s marketing and finances to the products.… Consider inviting Ackman to Herbalife to learn more about the business, the products, the people.” The report even suggested that “Ackman would be drawn to a meeting that gave him a photo op and bragging rights for associating with someone he considers a bigger celebrity with the right image, perhaps President Obama, Michelle Obama, Oprah Winfrey, Jerry Bruckheimer, Mark Zuckerberg, Bill Gates, Melinda Gates, Warren Buffet, or the current or most recent Presidents and Past Presidents of Harvard, Yale, or Princeton.” The document also recommended Herbalife “see Ackman’s highly public campaign for what it is: an opportunity to tell the world about (the company).”
“Create a big, positive narrative around (CEO) Michael Johnson,” it recommended. “THIS is the good guy.… Convey his energy, enthusiasm, and vision for Herbalife.”
It advised Herbalife to “right-size the threat” and to “keep the focus away from Ackman personally and on the substance of his criticism. Any publicity centered on Ackman, even negative publicity, can play into his public persona as an ‘activist shareholder.’”
The battle with Ackman had consumed the company since December 2012, when Ackman had first laid out his stunning case and his billion-dollar short. Now—finally—for the very first time, Johnson and Herbalife’s other executives felt they could begin to understand why the war had happened in the first place.
It was a war that began with little more than a phone call.
William Ackman was sitting in his office at 888 Seventh Avenue, on Manhattan’s West Side, when the phone rang. It was early summer 2011, and a woman named Christine S. Richard was on the line, a hint of urgency in her voice.
“Bill, I think I found the next MBIA,” she said through the receiver, knowing the acronym would instantly pique Ackman’s interest.
MBIA was the bond insurance behemoth that had arguably put Ackman on the map. He’d battled with the company from 2002 to 2009, ultimately winning a $1.4 billion windfall, but not before a sprawling struggle in which he became the subject of investigations by both New York’s attorney general, Eliot Spitzer, and the Securities and Exchange Commission.1
It was a long and drawn-out affair that had begun when Ackman, a relative newcomer on the hedge-fund scene at his fledgling firm, Gotham Partners, went short on MBIA stock, betting its shares would plummet if the then white-hot housing market weakened. In addition, he’d bought something called credit default swaps—insurance policies, in effect, that would pay off even further if the company went bankrupt, as Ackman expected. Ackman had accompanied his investment with a fifty-page missive titled “Is MBIA Triple A?” that took aim at the company’s pristine credit rating—in essence, its lifeblood.2 Ackman systematically took the company apart, accusing MBIA of misrepresenting the value of its assets and listing several accounting shenanigans and other transgressions he claimed could lead to a liquidity event—the death knell for a business where confidence in the company’s credit means everything. MBIA chief executive officer Gary C. Dunton admitted as much about the firm’s prized triple A rating, once telling the New York Times reporter Joe Nocera that it was the most critical thing MBIA had. “Our triple A rating is a fundamental driver of our business model,” he had said.3
Simply put, MBIA would be toast without it, and Ackman knew it, which is why he also did something almost unheard of at the time for a short-seller—he released his scathing report over the internet in a public “fuck you” of sorts to the company. Ackman wanted people to read it—for the market and investors to doubt the firm’s solvency—and he didn’t stop there. Ackman went to the SEC and New York State insurance regulators, hoping they’d come to the same conclusions he did, slap the company around, and cause the stock price to plummet.
The effort, though intense, was mostly for naught, as month after month, then year after year, Ackman pressed his case, and MBIA managed to fight him off.
Finally, the tide began to turn in Ackman’s favor when the SEC and Mr. Spitzer began investigating MBIA’s accounting practices in 2004.4 One year later, the company would be forced to restate its earnings for an eight-year period, though the stock held up reasonably well during this process, which tested Ackman’s resolve.
The investment finally paid off in 2007, when the onset of the financial crisis crushed stocks like MBIA under the weight of the subprime housing bust. Lehman Brothers and Bear Stearns would eventually go belly-up, and many wondered if companies like MBIA were next.
Sure enough, MBIA shares did suffer. By December 2007, shares had fallen more than 56.3 percent, including more than 25 percent in a single day, as confidence in the sector quickly began to evaporate.5 It may have been a lucky break, but Ackman had finally received his bounty. He made more than $1.4 billion on MBIA and earned a reputation as one of Wall Street’s hot shots.
Richard hoped Ackman was ready for another go-around.
It wasn’t an easy sell. The more than half-decade war with MBIA had left its battle scars, or “brain damage,” as Ackman described it. He’d told those close to him, even some of his own investors who were clamoring for the next big hit, that he’d almost certainly never do such a public short campaign again. It was just too exhausting.
“I didn’t want to do another public short,” said Ackman. “It’s a huge strain on the organization, and you get a lot of this negative press, and everyone hates you. That’s really the answer.”
No one understood the ordeal more than Richard herself. She had documented the whole MBIA saga while an investigative reporter at Bloomberg News, exposing some of the company’s major issues. She later wrote a book about Ackman’s crusade, Confidence Game: How a Hedge Fund Manager Called Wall Street’s Bluff. It told of a relentless investor willing to go to great lengths to win, even if it meant waiting years to do so.
The MBIA story, and all of its gyrations, had taken its toll on Richard too. After taking a leave of absence to write the book about Ackman’s quest, she left Bloomberg altogether to take a job with the Indago Group, a small and somewhat secretive boutique research shop that counted some of New York’s top hedge-fund managers as clients, including Ackman.
Richard and the firm’s founder, Diane Schulman, a former TV producer and licensed private investigator, were paid top dollar for their exclusive investment ideas and had been given the catchy, if kitschy, nickname “The Indago Girls” by their mostly male clientele. Schulman had helped the investor Steven Eisman, famous for his role in Michael Lewis’s The Big Short, do some digging for his short bet against for-profit education stocks.6 Eisman had made a killing on the investment, giving Schulman and Indago some well-deserved street cred in the ego-heavy hedge-fund world.
Schulman had given Richard a list of companies to comb through—some Chinese internet firms and the like—but they were too opaque and obscure and hard to do good research on. However, there was another name on Schulman’s list that Richard vaguely recognized from some reporting a former colleague had done years earlier—the name she’d tell Ackman that day on the phone in the summer of 2011. It was Herbalife.
Herbalife was a publicly traded nutrition company that sold health shakes, teas, and vitamin supplements. When Richard gave him the name, Ackman paused for a moment, as if he’d never heard of the company before. Even if he had heard the name, he probably didn’t know its ticker symbol or exactly what it did. That would change, and soon.
Richard briefly ran through some of the research she’d already done on the company, telling Ackman how she thought it could be a pyramid scheme.
Now Ackman seemed intrigued.
Richard had spent hundreds of hours poring over pyramid-scheme cases, finding many troubling similarities to what she’d dug up on Herbalife. She didn’t have to look too hard either. Multilevel marketing (MLM) companies have been heavily scrutinized since the early 1970s, mostly for their controversial pay structures in which people are compensated for how much product they actually sell along with how many new folks they recruit into the business. Other short-sellers have given the industry a quick scan plenty of times throughout the years, believing the twisty businesses enrich only those who get in early, while the rest of the suckers who sign up late get screwed. Some have even been called pyramid schemes by the government, were later sued, and then were permanently shut down.
In one of the first such cases, a company called Koscot Interplanetary, which sold beauty services and cosmetics, was targeted by the Federal Trade Commission (FTC) and accused of being a fraud.7 Those who signed up were encouraged to spend $2,000 for essentially nothing more than a fancy title and the right to earn commissions. They were then prompted to spend another $5,400 to buy the actual cosmetics. Members who joined would earn bonuses on new recruits who came aboard, as long as they also made similar investments.8
But on November 18, 1975, Koscot was ordered by the FTC “to cease using its open-ended, multilevel marketing plan; engaging in illegal price fixing and price discrimination and imposing selling and purchasing restrictions on its distributors; and to cease making exaggerated earnings claims and other misrepresentations in an effort to recruit distributors.”
Other cases soon followed, providing Richard with a treasure trove of material. Even in recent years, there have been companies with some of the same eyebrow-raising characteristics. In June 2007, the Federal Trade Commission sued the MLM company BurnLounge, which operated online digital music stores. Following an investigation, the FTC concluded BurnLounge was a pyramid scheme since the majority of its members were compensated more for recruiting new members into the business than for actually selling services.9
In July 2007, a California court barred the company from operating and froze the assets of one of its promoters, pending a trial. More than fifty thousand people were said to have been affected in the scam, with more than 90 percent of them losing money.
The FTC shuttered several more MLMs, including the Global Information Network, Trek Alliance, and a company called Five Star that marketed leases of “dream vehicles” for free, as long as they paid an annual fee and recruited others into the opportunity. After a trial, the US District Court for the Southern District of New York determined Five Star was a pyramid scheme since people didn’t make anything near the money they were promised.
As for what had been found on Herbalife, “Send me something,” Ackman told Richard, who made an appointment to visit him face-to-face the next time she was in the city.
The day of the meeting, Manhattan was sweltering, the humidity barely budging even after a midday downpour, when Richard, still soaking wet from the storm, took the elevator up to the forty-second floor, and the offices of Pershing Square, Ackman’s firm.
- "Told in a breathless, urgent style, this is a trenchant business drama that brings life to its characters and will mostly appeal to business buffs."—Publishers Weekly
- "When the Wolves Bite is the thrilling story of an epic battle between two business titans. Nobody can tell it like Scott Wapner does, because nobody knows activist investors better than he does. If you want to know what makes billionaires go to war, you must read this book!"—Jim Cramer, host of MadMoney
- "When the Wolves Bite completely changed the way I think about activist investors. A fantastic read from a man who keeps these titans of business honest on his show every day."—Kevin O'Leary, SharkTank investor and chairman of O'Shares ETFs
- "It's never about money. It's always about ego. This book is a telling examination of the psychology of billionaires trying to one-up each other."—Andrew Ross Sorkin, NewYork Times bestselling author of Too Big to Fail
- "When the Wolves Bite reads like an action film with multiple combatants, but the story is told from a neutral corner, capturing all the nuance, drama, and importance of a giant battle. Scott Wapner provides great insights for all into a very complex world."—MichaelOvitz, cofounder of CAA
- On Sale
- Apr 24, 2018
- Hachette Audio