Icahn's Herbalife People in a Tight Spot

 | Mar 25, 2014 | 11:05 AM EDT
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You can't help feeling badly for Hunter C. Gary, Jesse A. Lynn and James L. Nelson. Don't know them? They are the "Icahn slate," the people who will be nominated as directors for Herbalife (HLF), as part of Carl Icahn's attempts to bring out the value of the supplements company. They would join Jonathan Christodor and Keith Cozza, Icahn's two current representatives on the board.

It makes sense. Icahn owns 16.8% and has repeatedly talked about the company's undervaluation, including just yesterday. As Icahn pointed out, the Herbalife stock would be worth a lot more "if it weren't for [Bill] Ackman in there driving everybody crazy."

So why do I feel badly about the people on "the slate"? Because, and I quote The New York Times, which has done a lengthy investigation of the attempts by Ackman to destroy Herbalife to make good on a billion-dollar bet against the shares, "Over the last year Mr. Ackman called on regulators to investigate the company and lobbied members of Congress to pressure state and federal regulators. He also paid consultants and lobbyists to help organized protests, letter writing campaigns and news conferences pointing to these events as evidence that the walls were closing in on Herbalife."

Just two weeks ago, Herbalife received a devastating blow from the Federal Trade Commission, which has agreed to investigate it. The hope for Ackman is that the FTC issues an injunction against the company and that it is shut down.

You have to believe that the next step could be that Ackman goes after these directors personally, as board members can be found liable for the acts of potentially renegade companies.

Ever since The New York Times documented Ackman's acts to crush Herbalife and there was no fault except the FTC investigation, it became clear to me that unless the company is taken private and the endgame is realized, Ackman won't stop until he wrecks the company.

I believe that any company can be wrecked. You can take apart any company. If you can take apart a bank -- and we know that happened in 2008 to even the best banks -- who is to say that you can't create enough mischief to destroy a supplements company? In fact, I would argue that Ackman could create so much headline risk and produce so much documentation from the relatively unsophisticated people who sell Herbalife supplements that the company, if it can't stop Ackman, could actually be a goner. Why not? Didn't George Soros bring down the pound? Why can't Ackman bring down Herablife? Why can't he foment enough investigations that one sticks?

That's why the only way out of this for Herbalife is to do what it once did before: go private. No short position can survive a leveraged buyout. Ackman knows that, so some of his attacks are meant to keep the banks and private-equity firms from working on a deal to take remove the equity and privatize it. The company certainly has the cash flow to do it.

One thing is certain, though: No one who works at Herbalife who is on the board of directors is safe from this man, who must bring this company down and throw all of the people who work for it out of work in order to make his year.

Sure, if you think it is a Ponzi scheme, or if you are short the stock, betting that Ackman has to win, then you are thrilled about Ackman's push. No matter; it's all personal, and the personal liability I think that Ackman wants to inspire here could make life hell for these new directors. It could be still one more brilliant way that Ackman gets the job done. Just an amazing assault and one that can't be stopped as long as this company is public. 

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