The Herbalife Saga - Bet of USD 1 Billion

The Herbalife Saga, also known as the Battle of The Titans, involved two prominent activist investors, Carl Icahn, the founder of Icahn Enterprises, and Bill Ackman, the founder of Pershing Square Capital.?

This story gained widespread attention due to the clash between these two investment bankers from the US due to their different perspectives on Herbalife Nutrition Ltd (Herbalife) which is a global multi-level marketing corporation that develops and sells dietary supplements. However, according to Ackman, it was a?pyramid scheme?disguised as a nutritional products company in which distributors of its diet shakes and other products earned more money from bringing recruits into the network than selling.

Ackman accused Herbalife of being a pyramid scheme, and Herbalife fought back saying it was a legal multilevel marketing company. Pyramid schemes are illegal, while legal multilevel marketing is, well, legal. Ackman also said that Herbalife was the most well-run pyramid scheme in the world, implying that the fraud they perpetrated was far-reaching and extremely deceptive.?

Due to his negative sentiment about Herbalife’s stocks, he believed that the stock would fall drastically & come to zero and accordingly, accumulated a?short position?of about $1 Billion hoping to make a windfall gain out of it. The activist investor launched his crusade against Herbalife in 2012 when he placed a massive short-selling bet of USD 1 Bn against it. Herbalife’s stock fell when Ackman started shorting it and moved drastically towards the south when questions were raised about the Business model. Products & integrity. At that time, Herbalife stock plunged 20% in three days before eventually rebounding.

Shorting represents negative sentiment about a certain stock bond or other types of investment and is a way to make money on stocks for which the price is falling. An investor borrows a stock, sells the stock, then buys the stock back to return it to the lender. The negative sentiments around the company increase with the increase in dollar value of the bets against a company. The maximum gain from a short is the value of the amount that was borrowed to be shorted. This is because the stock being shorted can drop to $0. So, the anticipated profit range for Ackman was between 0 to USD 1 bn.?

However, the situation changed drastically, when another billionaire investment banker Carl Icahn who was highly optimistic about the business model & products of Herbalife started investing and increasing his stake in this stock. The market reacted to this news very positively & share price again started soaring back to new highs. This was the point when the actual feud between these two investment titans started. Ackman who did short selling by borrowing the shares needs to ultimately purchase the shares from the market and return them to the lender. In this kind of situation, the demand to buy the stock to cover the short position further drives the stock price higher. That is what Icahn attempted to do to get Ackman to exit his short position and profit even more from those who joined Ackman in shorting the stock.

Finally, the epic battle of Herbalife was over after 5 years when Ackman finally closed his short position and accepted that Five years was long enough to decide that Herbalife may not go to zero as he expected and unwound his entire bruising bet against the nutritional products company registering a loss of around USD 1 Bn and Icahn emerged a winner registering massive profits.