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The Curious Case of William Ackman

Jack Mohr (The Street) -- In ancient Greek mythology, a character possessed Hubris if he convinced himself he could be equal to the gods. In "Oedipus Rex", King Oedipus suffered from Hubris. According to the prophecy of "The Oracle of Delphi", Oedipus was fated to kill his father and marry his mother. The King didn't like this plan. His Hubris blinded him, and thinking he could defy the gods, he embarked on a chain of actions that led inextricably to, well, the killing of his father and marrying of his mother.

Enter Bill Ackman, the 45 year-old Harvard educated billionaire and founder of the prestigious $13B Pershing Square Capital Management. For well over a year now, in a rolling thunder of increasingly bad news, his $1 billion bet against the global nutritional supplement company Herbalife (HLF - Get Report) has been looking more and more like an act of supreme Hubris. Yesterday, in a three-hour fist-shaking at the gods of finance, Ackman may have finally received his Oedipus reward.

For anyone new to the story, here's a quick recap. Back in December 2012, Mr. Ackman gave a 342-slide presentation at a conference in NYC in which he publicly disclosed his $1 billion 'short' bet against Herbalife, accusing the company of being a criminal pyramid scheme, declaring "This is the highest conviction I've ever had about any investment I've ever made" and claiming its stock was destined to fall to zero once regulators stepped in. Herbalife shares proceeded to plummet, losing nearly half their value in the three days following the presentation. The market's initial response did not last, and Herbalife is up over 100% since then as regulators failed to step in swiftly (though the FTC announced it has opened up an inquiry into the matter) and other hedge fund luminaries, most prominently Carl Icahn, have taken the opposing position. Ackman wrongly assumed that his initial powerpoint presentation would cause a market panic that would render the company's sales force inert and compel regulators to step in immediately. Fifty million dollars, two years and tens of thousands of man-hours later, Mr. Ackman has hardly reaped the fruits of his labor. Instead, he is sitting on security losses well in excess of $500 million.

So why was yesterday such a seminal event for Mr. Ackman and Herbalife? Because we may have witnessed the moment when Ackman's actions precipitated his fall from glory to death-spiral, while simultaneously precipitating Herbalife's Phoenix-like rise to glory-- with one passing the other mid-air.

Ackman sold the story that he would deliver a "death blow" presentation, the "most important of [his] career", at 10 AM yesterday in Manhattan, finally clarifying the basis for his Herbalife short and the impending doom that was sure to befall the company. Indeed there was a presentation. But there was no death blow.

In the presentation that followed, the world saw William A. Ackman transform from an objective and cerebral fund manager to the one who cried wolf. In his three hour declaration, Mr. Ackman offered a marathon critique of Herbalife that ended up being more of an attack on his critics than a substantive attack on the company. He compared its sales practices and tactics to those of Enron, the mafia, drug dealers, and even Nazis. He lashed out at the company's outside professional service providers, including the auditing firm PricewaterhouseCoopers and even chided Madeleine Albright, the former secretary of state, who has spoken at company events. It was Ackman versus the world. He ended his presentation close to tears as he 'emphatically' appealed to Herbalife's CEO, pleading with the "corporate predator" to cease operations.

Mr. Ackman's tears of desperation were met with tears of joy by the market, which failed to find a "death blow", let alone any incremental evidence in the fund manager's Broadway production. In a punishing referendum, Herbalife's stock price rose throughout the talk, climbing more than 25 percent by the end of the trading day. Of course, Mr. Ackman said he did not mind, adding that he had spent $50 million attacking Herbalife and would ultimately be proved correct.

"I am an extremely, extremely persistent person. Extremely," he added. "And when I believe I am right, and it is important, I will go to the end of the earth."

The earth may now be flat, at least for Mr. Ackman. He has reached the edge of its cliff. Yesterday might well mark the end of his journey with Herbalife, at least in terms of any relevance his comments will carry in the markets. His speech and the hype that came along with it may well prove to be a fatal tactical error in Pershing Square's short-selling campaign. It is now hard to imagine how Ackman will be taken seriously, and that removes a lot of uncertainty in Herbalife stock.

Ackman's case is, well, a curious one. He has made mistakes before, such as with J.C. Penney (JCP - Get Report). The J.C. Penney debacle, however, resulted from a misunderstanding of that company's consumer. In the Herbalife situation, Ackman mistakenly believed his own passion would be infectious, and that others would see the magnitude of Herbalife's deficiencies as he does. A man known for his methodical, analytically rigorous approach to studying investments - borne out of both an undergraduate and business school education at Harvard, along with many years of marked professional success - seems to have fallen victim to his own arrogance and emotions.

Mr. Ackman's career in finance is hardly over. But he will never forget "the most important presentation of [his] career." Perhaps, once this experience has marinated for awhile, he'll approach future investment decisions with the sobriety and analytical rigor for which he was once so well known. In the meantime, the brilliant words of 18th century Irish statesman Edmund Burke ring vividly: "Whoever undertakes to set himself up as a judge of Truth and Knowledge is shipwrecked by the laughter of the gods."

--Written by Jack Mohr in New York


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