A protracted war over Herbalife?


The Deal Professor has weighed in on the hedge fund war over Herbalife.

He came to the conclusion that, "Without someone buying the company, it is essentially a stalemate. The only way out appears to be over time as each quarter unfolds and Herbalife's model holds up under Mr. (William) Ackman's scrutiny — or doesn't. Let's face it, without something to stop the attacks, the company is going to undergo strain as time goes on and the questions and suspicions persist. But this could take years."

His view is predicated in part on the assumption that a meaningful short squeeze will not materialize anytime soon, given the plentiful shares available for shorting purposes among other things.

"So, it's unlikely that Mr. Ackman will be forced into a short squeeze without someone buying the entire company. Except for Mr. Icahn, it is hard to see anyone making a bid, given the uncertainty and the unwillingness of a bank to finance an offer. Certainly, a private equity firm would not want to take the risk."

But will the winner be determined only after several years?

The battle certainly will likely not end quickly, though Ackman has land a few recent blows. He gave a presentation last week comparing Herbalife to Fortune Hi-Tech marketing, which was shut down by regulators.    

In any case, Ackman's $1 billion short position is not free, or even cheap. In fact, the costs could really spike over time. It's unclear how much his prime broker, Goldman Sachs, is charging him in interest and fees, but it's fair to say that the bank is in this business to make money. At the same time, while shares are plentiful on the market, if the short position loses value over time, the prime broker is likely to ask for more collateral, which could be quite costly if the stock soars.

So a massive spike in the shares in the near term may be enough to prod Ackman to reduce his position. Then again, he is a proud man, and he may be willing to hold onto his bet no matter what the cost.

The Deal Professor may well be right, but it's fair to say that a protracted war could end up being very costly to at least one of the combatants. 

For more:
- here's the essay

Related articles:
Bill Ackman's Vanity Fair treatment
Investigation shakes up Herbalife battle