Herbalife Ltd: Ackman vs. Icahn – The Real Lesson Is Taxes

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Herbalife Ltd: Ackman vs. Icahn – The Real Lesson Is Taxes

Herbalife: Ackman vs. Icahn – The Real Lesson Is Taxes by Matt Brice, The SOVA Group

About two years ago a very public debate among the big boys began to play out.  I am not participating in the debate, but it provides a great example of how investment decisions should be driven by valuation, not taxes.  A little background.

Unless you were living under a rock the past few years, you know that this guy named Ackman is short Herbalife and another guy named Icahn, who incidentally doesn’t much care for Ackman, is long Herbalife.

Icahn owns a lot of Herbalife stock and his average price is around $36.  Less than a year after Icahn’s investment, Herbalife’s stock climbed greater than 100%, exceeding $80 per share.  That’s a 100% gain, not too shabby.

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I have to assume he sold, paid short-term capital gains and walked away.  Even at the top marginal rate of around 50% (and it most likely less than this), his return still would have been 50% in under a year.  However, the tax advisor in you wants to suggest a great deal for Carl.  Here is your suggestion: wait a little bit, so that Carl receives long-term capital gains and then his 50% after-tax return will instead be 80% return (assuming 20% long-term capital gains).

Great deal…right?  Carl didn’t sell…[I am not implying that he didn’t sell because of taxes, but the end result and lesson is the same].

Fast forward to March 2015, let me check the stock price on Herbalife, roughly $42 (it was in the low 30s two weeks ago when I was thinking about this post).  So, instead of a one year after-tax return of 50%, Carl now sits on a two-year after tax return of about 13.5%.  Not only is his return much lower, but his money has been tied up in this investment for two years, instead of the less than one year time period it would have been if he had sold during the run-up.

This past year I owned a stock that received good news.  The market, however, perceived this news as AMAZING and the stock ran up approximately 200%.  I decided to sell. There were short-term capital gains involved.  That was ok.

6 months later, the stock is still up, but now only 22% from my original purchase price.

If Mr. Market wants to give you sky high valuations on the upside, I don’t think it is wise to consider waiting for long-term capital gains treatment.

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The Sova Group is a private investment fund managed by Matt Brice. As principal of The Sova Group, Matt Brice has been managing investments since 2009. Prior to founding The Sova Group, from 2007 until 2009 he worked as an associate attorney in the Mergers and Acquisitions group of Debevoise & Plimpton LLP, an international law firm based in New York City. Mr. Brice holds a B.A. in Philosophy from Brigham Young University and received his law degree from Columbia Law School.
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3 COMMENTS

  1. I’m almost certain that Icahn purchased his stock BEFORE ackman was short on Herbalife. Also, you need to research the definition of a pyramid scheme.

  2. Icahn bought Herbalife stock based on low valuation, not because of Ackman’s short. Icahn’s lawyer took a deep look at the Herbalife’s business model, and found it’s not a pyramid scheme. If anyone else other than Ackman shorted HLF, and drove down it’s stock price, Icahn would still have bought the stock. Icahn did not sell because he knew this stock worth a lot more than $80. He wasn’t trying to hurt Ackman. Ackman will be hurt by his own mistake and questionable behavior.

  3. Matt, while I agree with Ackman that Herbalife is an illegal pyramid and RICO fraud scam, I am not following your article. Icahn has hated Ackman ever since Ackman sued him and won. Icahn took the opposing position on HLF because of that hate, bought a huge stake and has several people on HLF’s board of directors. I don’t think Icahn has ever had an interest in selling his HLF stock, his hatred of Ackman would not allow him to do that.

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