When the Wolves Bite Read online

  Copyright

  Copyright © 2018 by Scott Wapner

  Hachette Book Group supports the right to free expression and the value of copyright. The purpose of copyright is to encourage writers and artists to produce the creative works that enrich our culture.

  The scanning, uploading, and distribution of this book without permission is a theft of the author’s intellectual property. If you would like permission to use material from the book (other than for review purposes), please contact [email protected]. Thank you for your support of the author’s rights.

  PublicAffairs

  Hachette Book Group

  1290 Avenue of the Americas, New York, NY 10104

  www.publicaffairsbooks.com

  @Public_Affairs

  First Edition: May 2018

  Published by PublicAffairs, an imprint of Perseus Books, LLC, a subsidiary of Hachette Book Group, Inc. The PublicAffairs name and logo is a trademark of the Hachette Book Group.

  The publisher is not responsible for websites (or their content) that are not owned by the publisher.

  A catalog record for this book is available from the Library of Congress.

  ISBNs: 978-1-61039-827-5 (hardcover), 978-1-61039-828-2 (ebook)

  E3-20180316-JV-PC

  CONTENTS

  Cover

  Title Page

  Copyright

  Author’s Note

  Introduction: The Masters of the Universe

  1. The Profile

  2. The Pitch

  3. The Activist

  4. Selling a Dream

  5. The Phone Call

  6. The Big Short

  7. The Poison Pen

  8. The Brawl

  9. The Icon

  10. The Exit and the Pile-On

  11. The Lobbyist

  12. The Death Blow

  13. The Year That Wasn’t

  14. The Flush and the Feds

  15. Finale or Fakeout?

  Coda: Big Thoughts

  Addendum

  Acknowledgments

  Notes

  Index

  About the Author

  AUTHOR’S NOTE

  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 Yal
e 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.

  1

  THE PROFILE

  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 re
acts 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.’”