Ackman vs. Herbalife

Bill Ackman is the CEO of Pershing Square Capital Management, one of the biggest and most active Hedge Funds in the industry.

Ackman has had a vendetta against Herbalife for almost 2 years now. Having spent $50million on private investigators, it is clear that Ackman believes that the firm is running fraudulent business. The results of the investigation has lead to Ackman placing a $1billion short position on its stock (source).

What is so bad about Herbalife?

It is believed by some that Herbalife is nothing but a pyramid scheme, a scheme where a company makes its business primarily from recruiting participants, as opposed to the sale of goods and services to customers. In Herbalife’s case it is argued that Herbalife is exploiting minority groups in America, by targeting them to fee-up between $3000-4000 to access the franchise. Out of all the participants in this scheme, Ackman’s sources declare that 88% make no money (source).

Ackman, and others, clearly believe this is not only a poor business plan, but one that is illegal. In a 3 hour televised punt at Herbalife, Bill Ackman stated that ‘By becoming legal they [Herbalife] die. Why? Because we don’t think there’s fundamental demand for the product’ (source).

Herbalife share price. Yahoo! Finance.
Herbalife share price. Yahoo! Finance.

Ironically following Ackman’s televised claims against Herbalife, the stock rose 20% to $66, a 4 month high. With a suspected $600mil short bet (the other $400 mil thought to be in put options), Ackman would have lost $120mil in just 3 short hours. However, as shown in the chart above, in the following month Herbalife fell back to around ~$50.

What next?

Herbalife has fought against Ackman in differents way, by initiating a convertible debt scheme for investors (where investors holding debt can convert it to equity, at a discount) and various buyback schemes. This has lead to a higher share price, thus pressuring Ackman to remove his short position and aggressiveness towards the firm.

For Ackman, he’s hoping that Herbalife fail a lawsuit against them for running a pyramid scheme, as this would justify his claims.

This is not the first time Ackman has been in short for the long run. In 2002 he expressed concerns with MBIA’s CDS activity and began shorting their stock. In 2009 he covered his short position, as MBIA’s credit rating was heavily downgraded.

As an added bonus to this deal, where Ackman believes Herbalife’s stock will fall to $0, he claims he will donate all his personal profits to charity.

What do you think? Is Herbalife a reputable firm, or a glorified pyramid scheme?

@Breadeconomics

 

 

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