The Activist Investor Blog
The Activist Investor Blog
Herbalife May Be a Great Trade, But It’s Not an Activist Investment
We haven’t formed a definitive view about whether Herbalife shares are actually worth nothing. We’ve read some of Bill Ackman’s presentations, and followed the overall debate.
We don’t know what to think about Odyssey Marine Exploration (OMEX), either. Investor Ryan Morris has researched thoroughly whether the company, which reclaims ancient shipwrecks, is also worth nothing. Morris’ Meson Capital has also taken on some activist situations in the past couple of years, and he earned a well-deserved reputation as a sharp, thoughtful emerging activist portfolio manager.
What we can say, though, is that neither situation is an activist investment.
In a Grand Tradition
Both current situations follow similar investments over the years. Ackman himself earned his reputation with his then-radical critique of bond insurer MBIA. His short there eventually paid billions, but only after he took numerous shots to his intellect and reputation.
Some prominent investors do the same thing, say David Einhorn with his short of Lehman Brothers. Others have gained a reputation for short-selling based on muckraking-type analysis and publicity, including Manuel Asencio, Ben Axler, Andrew Left, and The StreetSweeper. These latter combine investigative research, aggressive promotion, and short-selling to profit from companies that they think will become worthless due to fraud and deceit.
Many investors view these investors as misunderstood, lonely heroes that risk money and reputation to expose illegal and unethical business practices. A few investors, and almost all company executives, think they insult, intimidate, lie, and otherwise stop at nothing to wreck the reputation and business of mostly honest and hard-working people.
Is it Activist Investing?
We haven’t seen Ackman attach a label to the Herbalife situation, so we don’t know if he calls it activist investing. He is, of course, one of the more prominent activist investors anywhere, and the remaining Pershing Square positions involve activist strategies, so casual observers might logically call it activist investing. Morris has called the strategy for gaining value from OMEX “preventative” or “inverted” activism.
Others have called similar traders “activist short sellers”, famously in a Wall Street Journal profile from 1985 in which noted short seller Jim Chanos made his first significant media appearance. More recently, a law review article asks “Activist Short Sellers: Market Manipulators or Market Protectors?”, and highlights Herbalife.
Gaining value from Herbalife or OMEX will likely include interaction with company leadership, one of the attributes of almost any activist situation. In this sense both require the portfolio manager to become active, rather than remain passive.
Yet, it doesn’t make sense to call what any of we’ve discussed here “activist investing”. Herbalife, OMEX, and all the others do entail criticizing management, like just about every activist investment we know.
There is one big difference, though. Activist investing requires a long position, as the shareholder seeks to maximize the value of the company assets. Short activism, or preventive, inverted, or activist short selling, requires, well, a short position. The shareholder seeks a fall in the share price, presumably as the value of the company declines.
Activist investing is fundamentally constructive. An activist investor seeks to create value from a company’s assets. He or she just doesn’t think the company’s BoD and management can accomplish that. An activist short-seller is a short-seller first, and activist later, if ever.
It’s probably too much to assert that activist short-sellers affirmatively want to destroy value in a company. Rather, they profit from inevitable destruction of value, which they perhaps try to speed along. But, it’s not too much to say what they do is not activist investing.
Tuesday, February 4, 2014