- Herbalife's secret weapon;
- Bill Ackman's losing battle; and
- takeovers in the bank patch.
Herbalife's Secret Weapon Posted at 3:15 p.m. EDT on Friday, Feb. 15 Take Ackman out of the equation. Take Icahn out of the equation. Take Loeb out of the equation. Where does that leave Herbalife ( HLF - Get Report)? How about as an international company that is doing well -- well enough that it could leave the 20% of its business that is in the U.S. and still do great. Isn't that the ultimate weapon against the shorts? Isn't that the ultimate unimpaired earning power of HLF? When Bill Ackman says that HLF belongs at zero that means he thinks the U.S. regulators -- some regulators, we aren't sure -- are just going to shut it down. They will do that, he believes, because he is smarter than they are, wiser, and more caring than they are. They will do it, he believes, because he has done all of their work for them and they just have to issue the edict. But how about HLF? Does it have to stand by the edict? What happens if it takes one of the least profitable of its businesses, the U.S, and simply walks away from it? That's the ultimate challenge to Ackman. Herbalife is barely a U.S. company. Now, I know that Carl Icahn and Dan Loeb like it, and I sure wish that they would say. "We have checked this company up and down with our lawyers, former Federal Trade Commission lawyers, and lawyers who worked with other direct sale schemes, and Michael Johnson and his team are pristine." But I think the far more important concern is that the U.S. is not the engine here, so the U.S. cannot pull HLF down as much as Ackman needs a U.S. entity to try to do so. He can't buy one. He can't give enough money to senators and congressmen to shut it down. If he thought he could get a temporary restraining order against HLF, he would have tried already.
Looks Like Ackman Has Lost This Battle Posted at 7:00 a.m. EDT on Friday, Feb. 15 OK, let's say you are the U.S. government. You are the Federal Trade Commission. You are the Securities and Exchange Commission. You are the Justice Department. Are you going to, based on a hedge fund manager's say-so, shut down a company because this person says it is a criminal enterprise? Or are you going to take a look at the records of Dan Loeb and Carl Icahn and say, "You know what? They've done a lot of work. Let's just let the market decide whether Herbalife ( HLF - Get Report) lives or dies. It ain't dead yet, and these two investors say Herbalife is fine, and everyone recognizes these investors as being shrewd, with staffs that far exceed the ken of the government, and they own about 20% of the darned thing. So who are we to put it out of business?" Does anyone really want an Arthur Andersen on their hands, that infamous Justice Department case in which a stroke of a pen wiped out tens of thousands of jobs? Furthermore, is Bill Ackman a good stand-in for the government? Is it worth backing a hedge fund manager who has decided to wipe out a company? Is that a stand for the ages? Does that get you votes? Hence, the odd state of a company that someone needs out of business, while two others just need to sit down and talk about how $5 billion can be found to take the company private. And all it has to be is talk. Icahn and Loeb know two things. One: Herbalife has a pristine balance sheet that has been very successful at generating worldwide profit. If it wanted to do so, it could move offshore -- move to Mexico -- and become a huge player in a growth economy. Two: The issue with shorting is that stocks can go to infinity. They stop at zero but they can go to infinity.
Takeovers Galore in the Bank Patch Posted at 7:00 a.m. EDT on Friday, Feb. 14 Have you ever seen a more downgraded group than the banks? Yet they won't quit. I count downgraded bank after downgraded bank. Yet it's such a silly call to do so because we are about to see real lending in this country and when that happens the whole focus on net interest margin will go away. The new focus will be on takeovers as book values are scrubbed clean and new colossuses can be built. Consider the case of HomeStreet Bank ( HMST - Get Report), one of the best-performing IPOs from last year and a hungry regional bank with a book value that is 20% below its stock price. When you have banks that are trading north of book value and banks trading south of book value it can often be immediately accretive for the expensive bank to buy the cheaper one. The biggest bank that sells at a premium is Wells Fargo ( WFC - Get Report) and it owns more than 30% of the mortgage market. So that won't happen.