The epic war between Bill Ackman and Carl Icahn is over, and Icahn won

Bad news for Bill Ackman.

The Federal Trade Commission on Friday ruled that the multilevel marketing firm Herbalife is not a pyramid scheme

Ackman, the founder of Pershing Square Capital Management, has been short Herbalife since December 2012, when he made a $1 billion bet that the stock would go to $0 and began a campaign to convince regulators and investors of wrongdoing by the company.

Fellow billionaire and activist investor Carl Icahn took the other side of that bet several weeks later.

Their opposing views on the company have led to some heated exchanges, most famously a January 2013 conversation on CNBC in which Icahn once called Ackman a “crybaby” on live television. 

They have since de-escalated, famously hugging on stage at a conference in 2014.

And Herbalife wasn’t let completely off the hook by the FTC. The company must pay $200 million to settle charges and abandon incentives that reward distributors primarily for recruiting rather than sales. 

The FTC’s complaint showed that half of Herbalife’s top sales leaders earned less than $300 on average in 2014 and were encouraged to recruit more sellers regardless of whether there was consumer demand.

So, Ackman — who had made the recruitment of sellers a key plank in his effort to have it deemed a pyramid scheme — was partially vindicated. 

But lets remember that this is about investment profits. And on that front the outcome is clear.

Herbalife’s shares jumped nearly 20% following the news Friday, and they’re up nearly 70% since just before Ackman’s short position became public.

Icahn wins this one 

Icahn, who is now the company’s largest shareholder with an 18% stake, has been granted permission to own as much as 35%.

“While Bill Ackman and I are on friendly terms, we have agreed to disagree (vehemently) on this subject,” Icahn said in a statement released Friday. “Simply stated, the shorts have been completely wrong on Herbalife.”

Ackman was sticking to his line on Herbalife as recently as Thursday.

“Every day thousands of Herbalife distributors go on the web to host webinars and they attempt to recruit people with false and misleading statements about the potential of Herbalife business opportunities,” Ackman said on CNBC’s Halftime Report.

He referenced the $200 million settlement number that Herbalife had previously hinted at, adding:

“That’s what they would be willing to pay in a mutual resolution. That’s not what the government is willing to accept. That’s what they have apparently thrown out as a number they’re willing to pay. The reality here is this is not going to be about a dollar amount that Herbalife pays to the government to resolve this. The only way this thing gets resolved in my opinion is if Herbalife make material changes to their incentive structure to stop the incentives to recruit and my guess is that’s what the government is pushing for. Herbalife realises it can’t accept those changes or they will go bankrupt because no one is actually buying the product — you can’t make money selling the product at retail. This is going to end up with the government suing Herbalife for being a pyramid scheme or Herbalife capitulating and agreeing to changes. And in either circumstance, the stock is not going to be $60 a share and trading at 14.5x earnings. That’s why, certainly, we’ve been a patient investor here. I think this is the most attractive Herbalife has been from a risk rewards standpoint and that’s why we’ve stayed short. And if we felt it wasn’t an attractive investment we would have covered a long time ago.”

Herbalife’s shares have increased from $42.50 on December 18, 2012, the day before Ackman confirmed his short position, to about $71 around 10 a.m. ET Friday. 

Here’s Icahn’s full statement:

“I have always believed in Herbalife’s strong fundamentals and am pleased the Board has decided to increase my ownership limit from 25% to 34.99% of the Company’s outstanding shares.  A significant part of my investment success is directly tied to our in-depth investment research and understanding of often complex and unique issues facing companies.  One can be sure that this was the case with Herbalife where we spent considerable time and resources studying the false pyramid scheme accusations made against the Company.  Unlike many of those that “shorted” Herbalife, we did not rely on one or two research papers prepared by non-experts.  As a result of our research, over three years ago we concluded that Herbalife was not a pyramid scheme.  The FTC settlement announced today, coming after a two-year investigation also concluded that Herbalife is not a pyramid scheme — a conclusion that obviously vindicates our research and conviction.  While Bill Ackman and I are on friendly terms, we have agreed to disagree (vehemently) on this subject.  Simply stated the shorts have been completely wrong on Herbalife.  Now that the Company has reached a settlement with the FTC, it is time to consider a range of strategic opportunities, including potential roll-ups involving competitors, as well as other strategic transactions.

I have the greatest confidence in Herbalife’s CEO, Michael Johnson, and the entire management team, who have skillfully led the Company through adversity, including holding firm against a high-profile PR campaign against the Company by Bill Ackman where it was alleged more than once that the Company would be shut down. Obviously, we are still here.  I genuinely commend management’s steadfastness in the face of short sellers desperate to rally a bear raid based on false accusations. The short-sellers should also note that since joining the Board three years ago, we have paid attention to their accusations and while the vast majority have been baseless, a handful of their points were valid and the Company has made appropriate changes.  Interestingly, ending and modifying certain practices has not hurt earnings one iota.

Herbalife produces some of the finest nutrition products in the world and its direct sales model gives people an opportunity, either full- or part-time, to start their own business.   Without the Herbalife sales opportunity many of these people would be unemployed or otherwise have a difficult time finding work. In my teens I spent several summers working as a Fuller Brush man going door to door often working 12 hours per day.  I ended up earning more during the summer than my father.  Many of my friends who also started with me but were not willing to work as hard failed as salesmen.  But no one would believe their failure made Fuller Brush a “bad” company.  Fuller Brush, much like Herbalife, provided many people with potential income opportunities where such opportunities may not have otherwise existed.  Just because not everyone can be successful selling Herbalife products does not mean Herbalife is a “bad” company.”  I believe that now the cloud over Herbalife is gone, the Company will continue to grow and continue to provide much needed employment for many more hard-working people.”

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