The billion-dollar grudge

Bill Ackman was understandably fed up with Carl Icahn's resistance to honoring a contract the two signed. How Ackman expressed this frustration, however, had a 10-figure price tag.

Carl Icahn is a legendary figure in the financial world, considered a pioneer in what is now known as “activist investing.” He’s very rich.

Bill Ackman has become a legendary figure in the financial world. He is 30 years younger than Icahn. He is also very rich, though back in 2003, he was not nearly as rich as Icahn.

Ackman was closing down Gotham Partners, which was his first investment fund. As part of this process, he was liquidating (which means selling) his fund’s holdings in a company called Hallwood Realty.

Here’s how Ackman explained the transaction:

Ackman: “I sold it to him at a premium to where the stock was trading. I think the stock was (at) like $66, I sold it to him at $80, but it was worth about $150. And part of the deal was, Carl was like, ‘Look, I’ll give you schmuck insurance. I’ll make sure you don’t look bad.’ “

“I had another deal at a higher price without schmuck insurance, but I had a deal at Carl with a lower price with schmuck insurance. The way the schmuck insurance went, ‘Look, Bill, if I sell the stock in the next three years for a higher price, I’ll give you 50 percent of my profit.’ “

Icahn’s recollection — unsurprisingly — is quite different. Here’s how he recounted it during a live telephone interview on CNBC in 2013:

Icahn: “I was minding my own business, and in 2003 I get a call from this Ackman guy, and I’m telling you he’s like a crybaby in the schoolyard …

“He’s in my office talking about this Hallwood and how I can help him, and it’s like in the old song, you rue the day I ever met the guy.

“So he’s there and he’s talking about this company, and I actually called a friend who knew him, and the friend said, ‘Don’t deal with the guy. He’s in major, major trouble.’ …

“I will tell you – categorically – that Ackman knew he wasn’t going to get half the profits. This guy was in such trouble he was in no position to ask for anything. At the very end of the deal before we signed, he said, ‘You’ve got to do me a favor and sign something called schmuck insurance so that if you flip the stock, if you flip the stock, then I get half the profits.’ And I said to him, ‘Bill, I’m not going to flip the stock. I’m going to make a tender for it.’ And I did.

“I said, ‘And the company is going to find another buyer or I’ll buy it so you’re not going to get any profits.’ He said, ‘I realize that, I’ve just got to show my investors,’ – and he had only one or two left by that time, God knows what he had left, and he said, -- ‘I’ve got to show my investors I’m making money and all that.’

“At the end, we wrote it, and my lawyer is a great lawyer, he’s with me 20 years. He’s still with me. We wrote, and we still think what we said is right, but Ackman had got a New York court to agree that the fact they took it away from us, we never sold it, they took the stock away. We voted against the deal, and they took it against it. I was amazed what Ackman pulled, I really was, even though by that time I realized he’s the quintessential example that Wall Street, if you want a friend, get a dog, that’s what this is all about.”

Let’s go back to Ackman for his summary of the execution of the sale and what happened afterward:

Ackman: “Because I was dealing with Carl Icahn who had a reputation for being difficult, I was very focused on the agreement. And we didn’t want him to be able to be cute so the agreement said, ‘If he sells or otherwise transfers his shares …’ we came up with a definition to include every version of sale because, you know, it’s Carl.

“He then buys the stake, and makes a bid to get the company. He plans to get the company.

“Carl’s not the winning bidder. He sells his stock or he loses or transfers his shares for $145 a share. So he owes actually our investors the difference between $145 and $80, 50 percent of that.

“Lawyers never like you to put an arithmetic example. I put like a formula, you know, like out of a math book in the documents so there can be no confusion.

“So the deal closes, and he’s supposed to pay us in two business days or three business days. I waited a few business days. I call Carl.

“I’m like, ‘Carl, Congratulations on the Hallwood Realty.’

“ ‘Thanks, Bill.’

“ ‘Carl, I just want to remind you – I know it’s been a few years – remember the schmuck insurance?’

“He said, ‘Yeah.’

“ ‘You owe us our schmuck insurance.’

“He says, ‘What do you mean? I didn’t sell my shares.’

“I said, ‘Do you still have the shares?’

“He says, ‘No.’

“ ‘Well, what happened to them?’

‘Well, the company did a merger for cash, and they took away my shares, but I didn’t sell them.’

“I said, ‘Carl, I’m going to have to sue you.’

“ ‘Sue me? I’m going to sue you,’ he says.

“So I sued him, and the legal system can take some time and what he would do, we sued and we won in the whatever New York Supreme Court, and then he appealed. You can appeal like six months after the case, he waited until the 179^th day and then he would appeal. And then we fought at the next level. And he appealed all the way to the Supreme Court. Of course, the Supreme Court wouldn’t take the case.

It took years. Now, as part of our agreement, we got 9 percent interest on the money he owed us. So I viewed it as my Carl Icahn money-market account with a much higher interest rate. And eventually, I won.

If you’re interested in a more neutral appraisal of the standoff, the New York Times wrote a very thorough summary of the case back in 2011:

• Two Wall Street titans and a seven-year tiff | The New York Times, Nov. 26, 2011

It’s what happened immediately after the resolution that turned out to have what a scientist might refer to as a long tail.

Here was how the two described the exchange during that live telephone interview on CNBC:

Ackman: “After the whole thing, he called me up, and he literally said, ‘Bill, we can be friends now.’ I wish we had a recording of the conversation. I said, ‘Look Carl, you are no friend of mine.’ “

Icahn: “I never said that I want to be friends with you, Bill. I wouldn’t be friends with you.”

Ackman: “OK Carl. OK Carl.”

Icahn: “You said you’d like to be friends so that we could invest together.”

Ackman: “Carl, I have no interest. You think I want to invest with you?”

Icahn: “I wouldn’t invest with you if you were the last man on earth.”

It is a truly hilarious exchange that demonstrates that there is no amount of money that will immunize you from reverting to grade-school tactics in an argument.

These were two billionaires arguing on live television about who wanted to be friends.

Recently, Ackman has offered a bit more clarity on precisely what he contends he said during that post-lawsuit phone call. This is from the 2024 interview with Friedman:

Ackman: “Eventually we won, and eventually he paid, and then he called me. And he said, ‘Bill, congratulations. Now we can be friends. We can do some investing together.’ “

“I’m like, ‘Carl, fuck you.’ “

In the interview, Ackman exaggeratedly mouthed the F-word while whispering the expletive. Friedman then asked him to clarify it:

Q: You actually said ‘Fuck you,’?

Ackman: “Yes. Now, I’m not that kind of person generally, but you know, he made eight years to pay me – not even me, my investors, money they owed. So yeah.

“He probably didn’t like that. So he kind of hung around in the weeds, waiting for an opportunity.”

After closing down Gotham Partners, Ackman started a new investment fund called Pershing Square. It started in 2004 and had a major upward trajectory.

In 2011, Ackman began to hint publicly that his company had staked out a major short position in a company that he referred to as a scam. While he wouldn’t reveal the company, he stated that the country would be better off after the company collapsed.

So what is a short position? It is betting against a company’s stock price. Here’s an analogy that Ackman has used that I found instructive:

Ackman: “It’s a bit like you think silver coins are going to go down in value.

“And you have a friend who has a whole pile of these 1880 silver U.S. dollars, and you think they’re going to go down in value. You say, ‘Hey, can I borrow like 10 of those dollars from you?’

“He’s like, ‘Sure, but what are you going to pay me to borrow ‘em?’

“ ‘Well, I’ll pay you interest on the value of the dollars today.’

“So you borrow the dollars that are worth $100 each today. You pay him interest while you’re borrowing them, and then you go sell them on the market for $100. That’s what they’re worth. Then they go down in price to $50. You go back in, you buy the silver dollars back at $50, and you give them back to your friend.

“Your friend is fine. You borrow 10, you gave him the 10 back, and he got interest in the meantime. He’s happy. He made money on his collection.

“You, however, you made $50 times the 10 coins. You made $500. That’s pretty good.

“The problem with that is what if you sell them and they go from $100 to $1,000? Now, you’re going to have to go buy them back, and you’ve got to pay $10,000 to buy back coins that you sold for $1,000. You’re going to lose $9,000. And there’s no limit on how high a stock price can go.”

The company that Ackman’s fund shorted was Herbalife. It is a multi-level marketing company that sells weight-loss shakes direct to consumers. It also sells the opportunity to sell those shakes yourself as well as convince others to sell them, which will earn you a share of their sales.

“It’s a great meal and a great business,” or at least that’s the pitch. A financial reporter Ackman had known is the one who first pointed out the potential that Herbalife was a pyramid scheme.

Ackman: “The more work I did on the company, the more I was like, ‘Oh my God, this thing is an incredible scam.’ They purport to sell weight-loss shakes, but in reality they’re selling a fake business plan. The people that adopt it lose money, and they go after poor people. They go after – actually in many cases – undocumented immigrants.”

In 2012, Ackman made his fund’s short position public, explaining in detail why he thought the company’s stock would collapse.

Why make this public? Well, he wanted to generate attention of both investors and government regulators. If people lost confidence in the company or the government began investigating and potentially taking action, it would cause the stock price to drop, which is exactly what Ackman’s investment company needed to happen in order to profit.

Ackman: “I gave this sort of epic presentation laying out all the facts. Stock got completely crushed, and we were on our way. And the government actually got interested early on, launched an investigation pretty early. SEC and otherwise.”

This is the point when Icahn entered the Herbalife saga. He began to buy up Herbalife stock as well, and at one point he held an estimated 16 percent of the company’s stock.

Ackman: “His motivations here were not really principally driven by thinking Herbalife was a good company. He thought it was a good way to hurt me so he basically bought a bunch of stock and said it was a really great company.”

While Ackman was banking on the stock price going down, Icahn was going long. He wanted the value to go up. This would accomplish two things. It would increase the value of his holdings, and it would put Ackman’s fund in incredible danger.

Ackman: “He sees an opportunity, and he buys the stock. He figures he’s going to run me off the road.”

Remember, Ackman’s fund isn’t holding Herbalife stock. It has sold its shares, which were effectively “borrowed.” He will have to repurchase these shares at a future date.

The lower the stock price goes, the more money he is in position to make.

If the stock price remains the same, his firm would lose only the interest it paid to borrow the shares.

If the stock price goes up, though? Ackman’s firm is going to lose money buying them back.

Icahn had a vested interest in increasing the stock price.

Ackman: “What he did is he got on the board of the company, and used the company’s financial resources plus his stake in the business to squeeze us. And a squeeze – in short selling – is where you restrict the supply of the securities so that there’s a scarcity and then you encourage people to buy the stock, and you drive the stock up, and as I explained before – you short those coins at $10 and they go to $100, you can lose theoretically an unlimited amount of money and that’s scary. That’s why we don’t short stocks. That’s why I didn’t short stocks before this, but unfortunately I had to have the personal lesson.”

There was a documentary made about this particular investment: “Betting on Zero.” It was released in 2016, and while it looked at the story from Ackman’s perspective as an investor, the filmmaker also found a group of former Herbalife proprietors in Chicago who had felt burned by their involvement in the company.

In some ways, the film validates Ackman’s position. There were some very scammy things about the company.

However, the film also dramatically illustrates how Ackman’s attempts to point this out failed to impact the price of Herbalife stock in the way he hoped. The most dramatic example of this came as he prepared for a public presentation in 2014 which he promised would be the final nail in Herbalife’s coffin:

In preparing for potential questions, Ackman is asked by a public-relations strategist how he would respond if the stock goes up during the presentation and Ackman is then asked about this fact.

Ackman: “It’s irrelevant. It’s not going up, though, OK? The question is whether it opens again.”

Joe Silvan, PR strategist: “What can we come up with other than irrelevant?”

Ackman: “Stock’s not going up. It’s a certainty. Stock’s irrelevant if it’s not going up.”

Well, the stock did in fact go up during the presentation. And Ackman was asked about it:

Q: Since you haven’t looked at the stock price. I’ll tell you it’s up about 13 percent, bouncing around.

Ackman: “Herbalife is going to use the fact that the stock price is up today to say that everyone’s ignoring whatever we have to say. My advice is you probably shouldn’t ignore it. Next.”

There was an investigation into Herbalife. The Federal Trade Commission reached a settlement with the company, which paid $220 million in fines.

Ackman has said that he subsequently spoke to a professor at UC-Berkeley who’d been hired by the government as part of that investigation.

Ackman: “He got access to all their data, was able to prove that they were a pyramid scheme, but the government ultimately settled with Carl because they were afraid they could possibly lose in court. So they settled with him. But if you look at the stock, if we had been able to stay short the entire time, we would have made a bunch of money. The stock had a $6 billion market cap when we shorted it. Today, it’s probably $1 billion or a billion and a half.”

Ackman closed out his fund’s position in Herbalife in 2018, however. It wasn’t until 2024 when the stock price actually tumbled.

Ackman has pegged the losses his fun suffered at $1 billion and estimates that Icahn gained a commensurate amount.

Q: So how much for him was personal as part of the game of investing.

Ackman: “Well, he thought he could make money doing this. He wouldn’t have done it otherwise. He thought his bully pulpit, his ability to create a short squeeze, his control over the company, would enable him to achieve this, and he made a billion, we lost a billion.”

Q: So you think it was a financial decision not a personal?

Ackman: “It was a personal decision to pursue it, but he was waiting for an opportunity to make money at our expense, and it was kind of a brilliant opportunity for him.

Q: Is there any part of you that regrets saying, ‘Fuck you,’ on that phone call to Carl Icahn?

Ackman: No. I generally have no regrets because I’m very happy with where I am now. I feel like it’s a but like you step on the butterfly in the forest and the world changes because every action has a reaction. If you’re happy with who you are, where you are in life, every decision you’ve made – good or bad – got you to precisely where you are. I wouldn’t change anything.