The drama surrounding Bill Ackman's short position on Herbalife is heating up.
Recently, Ackman announced that he was short Herbalife, accusing it of being a pyramid scheme.
Today, Herbalife is unleashing its response.
Citing sources, Fox Business News' Charlie Gasparino tweets that Herbalife has got a bazooka up its sleeve for Ackman.
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Daniel S. Loeb, the founder of Third Point LLC, has a reputation for his strongly worded (and public) letters to companies and CEOs.
The sharp-tongued fund manager has made headlines again after taking a massive long position in Herbalife, the stock rival Bill Ackman has been publicly shorting.
Third Point has disclosed that it owns 8,900,000 shares or an 8.24% stake.
Ackman believes Herbalife, a multi-level marketing company that sells nutrition products, is a pyramid scheme. Loeb doesn't believe Ackman's accusation has merit.
Right now, it's an all-out hedge fund war between this hedge fund titans.
So who is this activist investor? We're going to a take a tour through Loeb's life and find out.
The hedge fund manager was born on Dec. 18, 1961. (He definitely looks younger than 51)
Loeb, the son of Ronald and Clare Spark Loeb -- a lawyer and a historian, respectively -- grew up in sunny Santa Monica, Calif.
Loeb used to get himself into trouble in the schoolyard with his big mouth.
So when he was 12 years-old at Paul Revere Junior High School in L.A., he hired a classmate for 25 cents a day to be "bodyguard" to protect him from bullies.
Even in his early fifties, Loeb still catches waves.
During his talk at the Jewish Enrichment Center in 2009, Loeb said that he has a "secret spot" in the Caribbean and he second favorite place in the world to surf is in Indonesia.
Source: Jewish Enrichment Center
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During today's investor presentation, Herbalife's president Des Walsh said the 'most offensive thing' from Bill Ackman's short thesis was when he showed photos of their "Nutrition Clubs."
Walsh says the clubs provide value to these communities, many of which are lower income and have a need for education about nutrition.
"This isn't a country club in Westchester or Connecticut," he said, adding "This is America" and we "shouldn't speak down about it."
Click here to see the photos >
Ackman, who has an "enormous" short position, believes Herbalife is a pyramid scheme. He also has a price target of $0 and believes the company is going to fail.
During a special Sohn Conference presentation last month, Ackman talked about how Herbalife portrays its "Nutrition Clubs" as "vibrant retail channels." To demonstrate this point, he put up a slide using a clip from Herbalife's Today Magazine showing a crowd of happy people drinking smoothies in a sunny and airy space.
Ackman also quoted the CFO from a conference call two months ago saying investors are encouraged to visit the clubs.
So the Pershing Square team decided to check out some clubs in Queens, New York and Omaha, Nebraska between March and September 2012.
They took some photos and we've included their findings in the slides that follow. Basically, Pershing Square's findings show that these clubs don't look like the ones that were advertised in the magazine from Herbalife.
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Legendary investor Carl Icahn has made his way into the battle over Herbalife.
So it's time to remember that this isn't the first time he's gone head to head with Bill Ackman.
Last time, though, he lost.
This time, who knows? When Ackman presented his dizzying takedown of Herbalife, a nutritional multi-level marketing company, last month, the Street was relatively quiet watching the stock through the holiday season.
Perhaps everyone was waiting for Herbalife to present it's side of the story today.
But even if they weren't, the quiet period may very well end now that Icahn's in the game.
The feud between Ackman and Icahn only ended in 2011 and dates back to 2004. One of the weirdest things about it? It was all over only $4.5 million.
In 2003 Bill Ackman's first hedge fund, Gotham Partners, had just blown up and he was being investigated by then-Attorney General Eliot Spitzer. The investigation was eventually dropped, but this definitely wasn't the best time in Ackman's career.
He needed to do a deal. Specifically, he wanted to sell Hallwood Realty, a company whose stock was trading about $60 a share but Ackman believed it was worth $140. So he called Icahn.
“By reputation, I knew he was a tough guy and a difficult guy,” Mr. Ackman says. “I wanted to make sure I could collect.”He continues: “I insisted the agreement be short. I also insisted it have a mathematical example in it, so that there could be no question about the intent of the agreement.”
That’s not quite the way Mr. Icahn remembers it. He says that he was the one who was worried, and that Mr. Ackman was under investigation and desperate to sell. (Both investigations were later dropped.)
“I checked him out,” Mr. Icahn says. “He was in trouble with the S.E.C.; he had investors leaving him. A few of my friends called me up and said; ‘Don’t deal with this guy.’ ”
Regardless, the two made a deal. Icahn bought shares of the company from Ackman for $80 a share with the promise that if he sold the shares and made a profit above 10% within the next three years they would split it.
To make sure everything was on the up and up, Ackman included some legal provisions in his contract with Icahn. First the contract stipulated that if there was any legal trouble, the loser would pay the winner's legal fees. Second it said that if payment was delayed, Icahn would owe Ackman a lot of interest.
In 2004, Hallwood merged with another company, for $137 a share. That meant Icahn made some good money on the deal, so Ackman called him for Gotham Partners' cut.
As Mr. Ackman tells it, the older man scoffed: “First off, I didn’t sell,” Mr. Icahn told him. Mr. Icahn argued that a merger did not constitute a sale of shares.
“Well, do you still own the shares?” Mr. Ackman asked.
“No,” Mr. Icahn said. “But I didn’t sell.”
And so it went. Mr. Ackman threatened to sue. Mr. Icahn roared that he would counter sue.
“Go ahead, sue me. You know what, I’m going to sue you!” Mr. Icahn shouted, according to Mr. Ackman, who says Mr. Icahn told him that he took his advice on MBIA and lost $20 million.
So Ackman eventually sued, and while the men barely spoke (their lawyers did all the talking) there was some name calling (from the NYT):
“The guy is a shakedown artist,” Mr. Ackman sneers. “His word is worthless.”
Mr. Icahn says: “He’s now the young gunfighter who wants to show he beat the older gunfighter with a big reputation. He just likes pounding himself on the chest.”
And there was an incident when the two men reportedly got into an argument at a restaurant when Icahn offered to settle the dispute by giving $10 million to the charity of Ackman's choice. Ackman said the money belonged to Gotham Partners and refused.
Then there was the time investor David Tisch asked Ackman about Icahn. Icahn wanted to invest in one of Tisch's funds and Ackman told him to think better of taking Icahn's money.
According to the NYT, though, Tisch and Icahn don't remember ever hammering out a formal offer for investment.
Meanwhile in Court, Icahn and Ackman's lawyers went to war for 7 years. Finally in October 2011, Icahn's final appeal was denied and Ackman was awarded $9 million.
However, to this day it's well known that Ackman and Icahn dislike each other. Even the New York Times Dining section has mentioned it. In a September 2012 piece about how NYC restaurant staffs accommodate their most loyal patients, this little gem appeared:
At Marea, Michael White’s Italian restaurant on Central Park South, for instance, the hedge fund manager William A. Ackman is a regular and one of many customers who rates an NR, never refuse. What the computer does not say (but the general manager, Rocky Cirino, knows) is that servers can never seat Mr. Ackman next to Carl C. Icahn, another big Wall Street name. The two have sued each other.
Now it looks like Herbalife is the next battlefield for these two. Buckle up.
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I tend to like nice guys. Don't we all? One of my favorite investors is John Templeton. Years after his death, he's still acknowledged as an exemplary person and great investor. But you don't have to be adorable to be a good investor. Dan Loeb, a sometimes off-colorful hedge fund manager, wrote a classic investment letter to investors in his Third Point hedge fund summarizing his results in the fourth quarter of 2012. It's available on Zero Hedge along with the news that he's taken a long position in Herbalife (more on that later).
High Potential of Gain
Managing money is a tough business. First you have to have the guts to exploit opportunities when everyone else is screaming in fear and running in the other direction. Loeb did that with investments in Greek Government Bonds, Yahoo! Inc, Murphy Oil Corp, Delphi Corp and American International Group Inc. That's very difficult in itself, and that's not even the toughest part.
Control Your Losses
The most successful investors in the world have trouble controlling losses. One investor who articulated that well was John Templeton. Many people don't know that he was not only a brilliant investor, he was a talented short seller. He shorted tech company IPOs before the lock-up period expired allowing employees to sell shares. If the stock did not go down as he expected and popped up instead, he would cut his losses. He didn't try to explain why it happened; it just did, and he followed pre-set rules he created for himself, because in those situations, the most important thing to remember is to not box yourself in with an oversized position, and above all, control your losses.
Few managers discuss controlling losses as Dan Loeb did it in his letter. His top fiver losers were Apple, Inc., Gold, Short A, Short B, and Overseas Shipholding Group Inc. Loeb notes:
A disciplined approach to avoiding major losses resulted in only four positions that detracted more than 25 basis points from overall performance.
In the fourth quarter of 2012, his fund was up 9.2%, and for the entire year, it was up 21.2%. He has a good track record in prior years, too. That doesn't mean that it will continue, but his approach seems to keep the probabilities in his favor by finding opportunities that limit his downside while having a high probability of upside. Important in this formula for success is that he's diversified the portfolio and exercises discipline in controlling his losses.
Herbalife
On December 23, I wrote that I agree with Bill Ackman, head of hedge fund Pershing Square, that Herbalife is ripe for investigation. I believe that not because of his presentation, which made some excellent points, but because of the lack of scientific evidence that Herbalife's products have any advantage over generic products and a thorough reading of a Belgian court decision that discusses its evidence that suggests Herbalife is a pyramid scheme. Herbalife is appealing that decision.
Mr. Ackman has publicly stated he believes Herbalife is a pyramid scheme that bleeds a demographic dry and then moves on to either a new country or a new demographic within the same country. Herbalife's demographic of choice in the United States at the moment seems to be the Hispanic community. Apparent earnings growth is at the expense of duped low income people that lose their "investment" when they are unable to recruit additional duped distributors as the base of the pyramid quickly fills up. Bill Ackman believes the company's share price has significant downside, perhaps even zero, but his disclaimers also note that he may cover his short at any time, which would eliminate his bet altogether.
Mr. Loeb and his advisors disagree with this assessment and point to the cash flows and multi-year earnings growth generated by Herbalife and its apparent low valuation to historic P/E ratios, among other things. He notes that management historically returned net income to shareholders in the form of dividends and share buy-backs.
Only one of these gentlemen will win the argument, but which of them is winning on the Herbalife bet? At the moment, both Bill Ackman and Dan Loeb appear to be winning. Ackman has a huge short position on Herbalife, around 20 million shares, but it appears he initiate this short when Herbalife was more than ten points higher than it is today, which means that on paper, he's made money on this trade. Dan Loeb has taken a long position in 8.6% of Herbalife, and he thinks the company is worth $55-$68 giving him 40-70% upside. It appears that Loeb bought the stock at a much lower price after Ackman's challenge to Herbalife, and the price has popped up since then. Loeb's investment seems sized better relative to his $10.2 billion portfolio. Both men can end up being "right" on their bet by consolidating gains or controlling losses (erosion of gains) as the case may be.
Herbalife: What Percent are Retail Customers that Haven't Signed Distributor Agreements?
Herbalife has an Analyst Day meeting today, and financial journalists will be watching to see how CEO Michael Johnson justifies his claim that 90% of Herbalife's customers are outside of the distribution network. On January 4 CNBC reported that Kate Kelly got Herbalife's CEO on the record:
Kate: Can you give us a percentage figure ... Mr. Johnson as to what percentage of your sales are outside of that distribution network?
Johnson: 90 percent?
Kate: So the vast majority?
Johnson: Absolutely.
It seems to me that Mr. Johnson will have to produce credible evidence to support this assertion if he is to be believed.
See also:"OMG! Dan Loeb Said What?" by Matthew Goldstein - Reuters, March 11, 2011, and "Bill Ackman is Right About Herbalife: It's Ripe for Investigation,"Huffington Post, December 23, 2012.
Read more posts on Tavakoli Structured Finance »
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Shares of Herbalife are up more than 3 percent as executives from the multi-level marketing company that sells nutrition products rebut hedge fund manager Bill Ackman's short thesis.
The stock has been trading in a range of $39.18 to $40.99.
Ackman, who runs Pershing Square Capital Management, is shorting 20 million shares of Herbalife. He believes the company is a pyramid scheme and has a price target of zero.
Since confirming his short, the stock is off 6%. It had been off more than 38%.
Herbalife is refuting his claims right now.
Check out the chart:
SEE: Herbalife Is Presenting Its Huge Takedown Of Ackman's Short Case >
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Last month, activist investor Bill Ackman delivered a mammoth presentation on his latest short--Herbalife.
Ackman, who runs Pershing Square Capital Management, believes the multi-level marketing company that sells nutrition products is a pyramid scheme.
His hedge fund is shorting more than 20 million shares and has a price target of zero.
Following Ackman's 342-slide presentation, Herbalife came out and said that he used outdated and inaccurate information.
Since December 18, the trading session before Ackman confirmed his short, shares are off 6%. They had tumbled more than 38% at one point.
Today, Herbalife presented its rebuttal to Ackman's claims.
We've included highlights below.
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This isn't the first time hedge funder Dan Loeb has taken on hedge funder Bill Ackman.
Before Loeb took the other side of Ackman's massive bet against Herbalife, he had a short position against Ackman's big gamble on JC Penney, according to a new report.
From the WSJ:
Mr. Loeb had taken a short position in J.C. Penney, JCP 0.00% a retailer that Mr. Ackman has sought to revive under former Apple Inc. AAPL +0.04% executive Ron Johnson, according to people familiar with Mr. Loeb's holdings. Penney's new strategy hasn't paid off so far, with both sales and the share price slumping. Mr. Ackman has told his investors the turnaround will take time. The company has repeatedly said it would take years to turn around the chain.
Business Insider contacted Third Point for comment, and was told the the hedge fund does not discuss its short positions. Ever.
However, in Loeb's latest investor letter (out yesterday) he wrote that both of his shorts had been losers over Q4 — and since a JC Penney short would've been profitable over that time, it is likely that Third Point has exited a JCP short.
Then of course there's Target, another Ackman investment that didn't perform. The New York Post claims that Loeb is still sore from losses he suffered from investing in Ackman's Target fund back in 2008.
It also called the two "frenemies," but that just seems a little extra, doesn't it?
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Today Herbalife put on a multi-hour investor presentation in response to hedge fund manager Bill Ackman's mammoth short thesis he gave last month.
Ackman, who runs Pershing Square Capital Management, was not impressed with their takedown of his case he made.
Here's the full release from Pershing:
William A. Ackman, CEO of Pershing Square Capital Management said, “In advance of today’s analyst day, Herbalife promised to provide a detailed refutation of each of the facts that we enumerated in our December 20th presentation. Instead, the company distorted, mischaracterized, and outright ignored large portions of our presentation. For example, Herbalife did not respond to our identification of overstatements and inaccuracies in the company’s earnings statement for distributors, which among other deceptions, excludes the 93% of distributors that have zero gross earnings.
In today’s presentation, Herbalife offered the opportunity for ‘anyone’ to ask questions of Herbalife so its business can be better understood.
Pershing Square will be publicly releasing a detailed series of questions that will assist investors, regulators, distributors, and other interested parties in understanding the truth about Herbalife. Thereafter, we will respond with particularity to every issue raised today by Herbalife.
Over the last three weeks, we have been contacted by numerous interested parties who have provided additional insight into Herbalife’s business practices. We will be addressing these new issues in our updated presentation.
Please go to www.factsaboutherbalife.com to view our presentation and learn more about the company.”
Pershing Square is shorting more than 20 million shares of Herbalife and believes the multi-level marketing company that sells nutrition products is a pyramid scheme. Ackman has a price target of zero.
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Herbalife, a multi-level marketing firm that sells nutrition products, responded to hedge fund manager Bill Ackman's massive short position today.
Last month, Ackman, who runs $11 billion Pershing Square Capital Management, presented a three-hour long short thesis explaining that he thinks Herbalife is a pyramid scheme.
His hedge fund is shorting more than 20 million shares and has a price target of zero. In other words, he thinks the company is going to fail.
Herbalife finally responded today with it's own two-hour, 102-slide investor and analyst day presentation at an event in Midtown Manhattan.
In their presentation, Herbalife aims to debunk the points that Ackman made about their distribution, retail sales and accounting methods, among other things. Herbalife also claimed that Ackman was "misleading" and used "misinformation."
We've included the full presentation in the slides that follow.
During the presentation, shares of Herbalife moved up more than 5%. They were last trading down more than 4%.
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Shares of Herbalife are soaring today.
The multi-level marketing company that sells nutrition products is up more than 8%.
Herbalife is the stock hedge fund fund titan Bill Ackman has been shorting. Ackman, who runs Pershing Square Capital Management, is short more than 20 million shares of HLF. He believes the company is a "pyramid scheme" and has a price target of zero.
Not everyone agrees with Ackman, though. A number of hedge fund managers, most notably Daniel Loeb of Third Point LLC, have gone long the stock.
Shares of Herbalife are still down more than 5% since December 18, the trading session before Ackman confirmed his short position. At one point the stock tumbled more than 38%, but has pared losses in recent weeks.
SEE: Bill Ackman's Dizzying Takedown Of Herbalife >
SEE ALSO: Herbalife's Full Presentation On Why Bill Ackman's Short Will Be A Disaster >
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Today looks ugly for hedge fund titan Bill Ackman, the founder and CEO of Pershing Square Capital Management.
One reason is because Herbalife, the stock he has a massive short position on, is up more than 8 percent.
Pershing Square is short more than 20 million shares of Herbalife and has a price target of zero for the multi-level marketing firm that sells nutrition products.
Ackman has publicly said that he believes Herbalife is an illegal pyramid scheme.
Meanwhile, JCPenney was last down more than 1.86 percent trading around $17.92 after hitting a session low of $17.36.
Pershing Square owns 39,075,771 shares, or a 17.82 percent, in JCP. Ackman, who has taken a bath on the stock so far, has been a big supporter of CEO Ron Johnson to turn the retailer around.
Check out the charts:
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Shares of Herbalife have rallied back since hedge fund titan Bill Ackman, the CEO of $11 billion Pershing Square Capital Management, revealed his massive short position on the stock.
Since December 18, the trading session before Ackman confirmed his short, shares of Herbalife are up more than 3.7%.
On December 24, the stock hit a 52-week low of $24.24 a share and has since rallied back in recent weeks.
Shares of Herbalife closed up $4.06, or 10.14%, to end at $44.08 yesterday. The stock was last up in pre-market trading this morning.
Check out this chart of Herbalife shares from December 18 to Jan. 14:
Pershing Square is shorting more than 20 million shares of Herbalife — a multi-level marketing company that sells nutrition and weight loss products.
Last month, Ackman gave a three-hour long 342-slide presentation at a special Sohn Conference event detailing his short thesis. His short is predicated on his belief that Herbalife is a pyramid scheme.
Ackman has a price target of zero and believes the company is going to fail.
Following Ackman's presentation, Herbalife came out said that he used outdated and inaccurate information for his presentation. The company then held an investor and analyst day in January to rebut Ackman's claims.
The fund manager didn't seem impressed with their rebuttal and said he would release an updated presentation.
Ackman, who has a reputation on the Street as an activist investor who tries to transform businesses, has launched a website for his short called FactsAboutHerbalife.com. He has even purchased Google ads when people search keywords related to Herbalife.
He also told CNN Money's Maureen Farrell recently that he's willing to go "to the end of the earth" to see his short play out. That means he would also lobby congress to change the law if regulators deem Herbalife to be a legal business.
A number of hedge fund managers don't agree with Ackman's short and have taken the long side, most notably Daniel Loeb, the founder of Third Point LLC. Loeb, who owns an 8.2% stake in Herbalife, said in a letter to investors that he thinks Ackman's bet against the company is "preposterous."
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Hedge fund hot-shot Daniel Loeb, the founder of Third Point LLC, has made an estimated $108 million profit so far with his long position on Herbalife, the New York Post's Michelle Celarier reports.
Herbalife, a multi-level marketing firm that sells nutrition products, is the stock that Bill Ackman has a massive short position on.
Ackman, who runs Pershing Square, believes the company is a pyramid scheme and has a price target of zero.
Not everyone agrees with Ackman, though.
Just last week, Third Point disclosed that it owns 8.9 million shares, or an 8.24% stake in Herbalife. The Post reports that Third Point purchased the Herbalife shares at an average price of $32.
Shares of Herbalife have rallied back above the pre-Ackman short levels and that's working out nicely for Loeb.
Since December 18, the trading session before Ackman confirmed his short, shares of Herbalife are up more than 3.7%. The stock hit a 52-week low of $24.24 a share on December 24 and it up more than 69% since then.
Shares of Herbalife closed up $4.06, or 10.14%, to end at $44.08 yesterday. The stock was last up more than 3.5% today.
Loeb doesn't believe that Ackman's pyramid scheme claim has any "merit" and he called his rival's bet against Herbalife "preposterous."
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I visited a Herbalife nutrition club in Queens. There is plenty wrong with this company – but this is not a post about the things that are wrong with the company (most of those I will leave for other people to think about). This is simply a post about what I observed and the implications for Bill Ackman's Herbalife thesis.
(a). There are a lot of Herbalife nutrition clubs in Queens. This is a Hispanic area and within the U.S. Herbalife is mainly a Hispanic phenomenon. If you use Google satellite navigation on your phone you will find lots Herbalife clubs (dozens are listed around Corona Queens) though some of the ones you try to locate will not be there any more (suggesting they have either moved or closed).
(b). I was told the best time to visit a nutrition club was between 7 AM and 9 AM so I dutifully arrived at about 7.15. The club was empty. I was told to go with a Spanish speaker because the clubs were pretty close to mono-lingual Spanish. The club was not signposted from the street and coloured paper made opaque the windows so a passer by would not know what was in there.
(c). I was served “all three,” meaning an aloe drink, a diet suppressing tea and the protein shake.
(d). This was the first time I had drunk a protein shake. I can tell you they suck - so does the tea for that matter. This stuff tastes unbelievably bad. It is flat-out-gross. I sent an email (with the trusty smart-phone) to a friend in Asia explaining where I was and told him how gross it was. He puzzled: he asked if I was a virgin. He explained that when he was a competitive lightweight rower (he rowed for an Ivy League university) he used to live on protein shakes as he had to keep his weight within the limits. And he exercised extensively on them. Exercise and protein shakes is a well-worn and proven weight loss combination. But they do taste gross. [I have been informed that Herbalife tastes slightly better than some protein shakes at the cost of adding some sugars – also I have been informed the texture is much improved by blending in a banana or even a mango. ...]
(e). There were no visitors prior to 8 AM. By 8 AM I was going to sell my entire Herbalife long and give up on the position. My Spanish translator talked to the guy running the place and he told us roughly how many visitors he got a day and told us the time they came in – and that it really started by about 8 AM.
(f). The translator was correct. The visitors started around 8 and in the next 75 minutes over twenty came in. They came in roughly to his schedule suggesting that they were regulars. They spoke in Spanish and he spoke to them as friends. Most of them were either no longer obese or in the transition from being morbidly obese to (merely) rectangular shaped.
(j). The key product: the proprietor/distributor greeted the visitors as friends and offered moral support as they drank the tea and the shake.
(k). There was a series of before and after photos on the wall. They were impressive – many of the customers – and the husband and wife team that ran the club – had gone from balloon shaped to roughly rectangular. [I gather before and after photos are impressive at other weight-loss groups such as Weight Watchers - however in this case there were a lot of impressive photos for a very small club.]
(l). The husband and wife who ran the shop had been Herbalife customers for about five and a half years and had been running the club for about eighteen months. They were true believers in the product – extolling its virtues and also repeating mostly in Spanish but also in Spanglish the benefits of the Herbalife system. [In their case they also also extolled the virtue of replacing the fat-and-cheese laden meals that were non Herbalife with something more nutritious and the virtue of some exercise even if it was just walking further.]
(k). The benefits of the Herbalife program in the wife's case were real. The wife had gone from a three insulin shot per day diabetic to a half insulin shot per day diabetic. [Statistically this should add over 15 years to her life expectancy.] Her prior body was balloon shaped.
(l). On the wall was a list of the seventy odd people who regularly attend this Herbalife club. There was a list of gold stars against the names with weight-loss and Herbalife consumption targets on them. Clearly the gold stars were part of the reward system. This looked a little like primary school.
(m). We asked if he had any “downline”. He explained to us that every one of his core customers was also a distributor – and they were a distributor to get the 25 percent discount on stuff they took home.
Observations
This club was not a club selling diet drinks (but it clearly did that). It was a club selling the social support group necessary to drink diet drinks. These diet drinks work (especially when combined with a modicum of exercise). What happens though is that normal people do not have the will-power to maintain a diet drink and exercise regime. My friend in Singapore did – but then he rowed competitively and people into rowing are austere driven people (think all those 4 AM starts).
But I am a fairly disciplined person and - without social support I could not drink these shakes.
In the richer-parts of our society we have a solution to diet-and-exercise will-power problem. We hire a personal trainer (usually someone cheerful, younger and good looking) and they cajole us into weight-loss. This is a “for-hire” personal support group.
But Herbalife is another valid mechanism of getting personal support – and it clearly worked on the customers I saw. Personally I find it very difficult not to endorse a product that reduced to one sixth a person's insulin injection requirement. If Bill Ackman thinks America would be better off without Herbalife he could politely explain that at the woman's funeral.
I will - in the interest of fairness - include the main negative observation: the man who ran this shop covered his rent (we worked that out) but he was cheerful man working hard (80 plus hours a week) and making an amount that was less than minimum wage. I gather than many (possibly a majority) of Herbalife clubs do not cover rent (consistent with the observation that there are lot of Herbalife clubs in Google maps that no longer seem to exist). Minimum wage appears to be the upside.
This showed both the benefit and problems with multi-level marketing. The benefit is that it allows a company (in this case Herbalife) to get deep into a community and that is a necessary part of the product – the product they are selling is community support for weight loss and they can't do that without getting into the community. The problem is that the company actively recruits distributors to the point that it is impossible for the distributors to be good businesses. Indeed as the rewards to many people in the chain are on recruitment (and you can't make it up the chain without a substantial “down-line”) it is likely that recruitment will continue until the distributors make nothing (or less than nothing when convinced to sign up by hard-sell rather than rational argument).
There were so many Herbalife clubs around Queens that I suspect on average the Herbalife shops make something near nothing or less than nothing. The profile of a Ferrari driving Herbalife distributor that Mr Ackman presented was – at least compared to what I saw – ludicrous.
I wrote once about income distribution in the US by working out how cheap my laundry was in Brooklyn and working out that it was being done in a sweat-shop with illegal Chinese workers paid under minimum wage. [I got a lot of flack for that post from my libertarian readers.] The Herbalife distributor I met (who may also have been an illegal) had a better life than those illegal sweat-shop workers. He did not earn much more money – but his job was community based and he interacted as a friend with a great many customers. That I think was personally satisfying and he clearly was happy with his lot. And the product saved his wife's life which trumps most things.
Herbalife as exploitative in a Marxist sense
Herbalife is clearly an exploitative system in the Marxist sense. The head-honcho is paid well over $70 million derived from a vast network of people earning minimum wage or less. Dan Loeb (who now controls 8 percent of Herbalife) is someone who often attacks excessive salaries for senior executives. This could become quite amusing.
Some comments on Bill Ackman's thesis
It was striking how totally Bill Ackman's thesis fell apart from observing for just a few hours in a nutrition club.
The best way of analysing Herbalife that I can find is as alcoholics anonymous for fat (and very often Hispanic) people. I joke: “my name is Jose and I am fat”.
Herbalife works in the same way as alcoholics anonymous – by supplying (and in this case selling) a support group to help you kick the “fat addiction”.
Like Alcoholics Anonymous it has millions of members and looks – at least externally – a bit like a cult.
Herbalife like Alcoholics Anonymous has millions of members because it works. It does not work because one nutrition powder is better than another (indeed some nutritionists argue soy based powders are inferior). Herbalife works because of the support group.
AA is probably the single most effective way devised by humanity to cure alcoholics. It is far more effective than any drug developed by pharmaceutical companies and if a drug were devised as effective as and as free of side effects as AA then it would be worth tens of billions of dollars. Even then AA probably fails a majority of times. Herbalife is among the more successful ways of curing morbid obesity (but even then it probably fails a majority of times). [I shudder to think what a weight-loss drug as effective as the Herbalife support system would be worth though - considerably more than Herbalife's market cap.]
The biggest difference that I can see between AA and Herbalife is that Herbalife is (emphatically) a for-profit institution (and possibly quite an exploitative for profit institution) whereas AA is just a club.
Lets run through Ackman's presentation by section
Ackman on Herbalife as a commodity
From Page 21 to 26 of the presentation Bill Ackman“demonstrates” that Herbalife's products are not unique – and from that he argues that they do not maintain their price position by being a “proprietary product”. He compares the product to GNC and other brands and notes the price per serve or the price per calorie is higher.
This is a complete misunderstanding of Herbalife's product. GNC and other brands are sold as commodities. Herbalife is sold with a community support mechanism.
In Central Park anyone can go and have a run. It is free. It costs you $20 an hour if you exercise with a personal trainer. Comparing the price of Herbalife (sold through a network) to the GNC (sold without a network) is like comparing the cost of a run through the park without and with a personal trainer.
Bill Ackman has just missed the point.
Ackman on Herbalife's lack of advertising
From pages 27 to 31 Bill Ackman notes the lack of advertising expense on Herbalife (which he argues is very little) and says that they cannot maintain their price premium that way.
This is of course garbage. Herbalife has the best advertising possible – word of mouth. People will pay huge sums to Facebook for the hope of getting someone to “like” a product online and hence endorse it to their friends. Herbalife has far more powerful advertising support than that – it is deep in the community.
Alcoholics Anonymous has 2 million members and I have never seen an advertisement for the product. However like you I have heard of AA. Brand recognition for community based products is (naturally) very high. I suspect almost every reader of my blog has heard of Alcoholics Anonymous without ever seeing an advertisement.
That said Herbalife does sponsor one of the biggest football teams in the world (Barcelona). It also sponsors LA Galaxy but nobody cares about them!
Bill Ackman on Herbalife's research and development
From page 35 to 50 Bill Ackman tells us all about Herbalife's (very thin) research and development program.
He is of course right that relative to its claims Herbalife has a very thin research and development program. So what: Alcoholics Anonymous – relevant to its claims – has a very thin research and development program. And yet it is known to work for a lot of people and the results are well known.
There is plenty of research that says social cues are important in whether you take drugs or not, whether you drink. And social cues are important as to whether you stay fat or not.
You don't need a lot of research to tell you that.
As Bob Dylan says: you don't need a weatherman to tell which way the wind blows.
The main Bill Ackman mistake
Page 164 of the Bill Ackman presentation lays out the key criteria for determining whether Herbalife is illegal. Here is the slide:
I will quote this as it is the core criteria for determining whether Bill Ackman is right:
The critical question for the FTC is whether the revenues that primarily support the commissions paid to all participants are generated from purchases of goods and services that are not simply incidental to the purchase of the right to participate in a money-making venture.
Bill Ackman spends most of his presentation arguing that Herbalife's product is the business opportunity. He argues for instance that most the product is sold to "distributors". This was clearly true in the Herbalife club I visited. Almost every customer was also a distributor. They however were clearly customers - they came in - they paid their money - they drank their shake. They look like customers because they were customers.
Bill Ackman calls these distributors victims of a false "business opportunity". Facts on the ground: they are customers.
That fact is very inconvenient for Bill Ackman because if they are customers then Herbalife is legal and Ackman's thesis falls apart totally.
Bill Ackman's logic as to why these distributors could not be customers is disarmingly simple - and amazingly erroneous. Bill Ackman argued that it was illogical for someone to sign up as Herbalife distributor for the 25 percent discount because even with a 25 percent discount the product was more expensive than commodity product available from GNC and other suppliers. [My Spanish translator came back to me with an errata on this point: he says that some of his downstream were considering the business opportunity - but the majority were distributors without any plans at all on the business opportunity.]
That is true. But it misses the point.
Remember those gold stars and the support group. If you buy weight loss shakes from GNC you do not get the gold stars. Buy the product from GNC and you are not part of this Latino self-help group. By not understanding Herbalife as a social support group for weight loss and by analysing the product as a commodity Bill Ackman has failed to observe what globally would add up to millions of customers. Real customers. The customers that make Herbalife legal.
What this story is really about
Herbalife is a company which combines a lot of good (think the life-saved diabetic above) with some pretty ugly features.
But this is not really a story about Herbalife - Herbalife will survive globally. Like all multi-level marketing schemes it will have its ups and downs. There will be all sorts of problems (such as tax compliance throughout the scheme, cash handling, perhaps even using Herbalife accounts to launder money).
What this has (deservedly) become is the story about how Bill Ackman can be so wrong. He spent (by his own admission) a year and a half analysing this company and his thesis can be falsified by visiting a few clubs in his home city. Bill Ackman's thesis is the most easily falsified bear-thesis I have seen from a major hedge fund ever.
You have to wonder how this happened. So I am going to tell you:
Bill Ackman a Harvard educated (ma gna cum Lauder) billionaire New York hedge fund manager bet over a billion dollars on a short position (imperiling his fund and his reputation) without checking the facts.
And he did not check the facts because he was so rigid with a misplaced silver spoon that he could not stoop to sit on a subway for thirty minutes and talk with poor people for ninety minutes.
John
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Blogger/hedge funder John Hempton, who runs Bronte Capital, has just published a long piece about visiting an Herbalife "Nutrition Club" in Queens, New York.
Hempton, who has called Herbalife "scumbags," disagrees with Bill Ackman's Herbalife short case and is betting against the Pershing Square Capital founder.
In his latest blog post, Hempton basically says that if Ackman had taken the time to visit the "Nutrition Clubs" he would see that they provide a "social support group" for these people to drink the diet drinks. He notes that the richer population's solution would be to hire a trainer, but that's an expensive option for a lot of people.
He also uses an example of a diabetic woman who went to the club and saw her insulin injection requirement reduced drastically.
"If Bill Ackman thinks America would be better off without Herbalife he could politely explain that at the woman's funeral," he writes.
He concludes with some extremely harsh words for Ackman.
What this has (deservedly) become is the story about how Bill Ackman can be so wrong. He spent (by his own admission) a year and a half analysing this company and his thesis can be falsified by visiting a few clubs in his home city. Bill Ackman's thesis is the most easily falsified bear-thesis I have seen from a major hedge fund ever.
You have to wonder how this happened. So I am going to tell you:
Bill Ackman a Harvard educated (magna cum laude) billionaire New York hedge fund manager bet over a billion dollars on a short position (imperilling his fund and his reputation) without checking the facts.
And he did not check the facts because he was so rigid with a misplaced silver spoon that he could not stoop to sit on a subway for thirty minutes and talk with poor people for ninety minutes.
Ouch.
Read Hempton's full piece here >
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Jim Cramer has picked a winner in the Herbalife cage match.
As you will recall, two hedge fund giants--Bill Ackman and Dan Loeb--have taken the opposite sides of this trade.
Bill Ackman argues that Herbalife is an illegal pyramid scheme and has a price target of $0.
Dan Loeb dismisses Ackman's claim as "preposterous" and has bought up 8% of the company.
Assuming one of these two doesn't chicken out, someone is going to win big...and the other is going to lose big.
And Jim Cramer, it appears, thinks the winner is going to be Dan Loeb:
The consensus is definitely rallying around Loeb and Cramer here. Carl Icahn has joined the fight on the long side (pro-Herbalife). As has hedge-fund manager John Hempton, who wrote a long, entertaining analysis of why Bill Ackman is blowing it, arguing, effectively, that the rich slim Ackman doesn't understand poor fat people.
The scuttlebutt is that Ackman's cost basis--the price at which he shorted the stock--is $53 per share. Herbalife has soared since Ackman first clobbered it with his massive and hyper-detailed Powerpoint presentation, but it has still only clawed its way back to $45.
So Ackman may still be in the money.
For now.
SEE ALSO: JOHN HEMPTON: Here's Why Bill Ackman Is Getting Herbalife Wrong
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Herbalife, a multi-level marketing firm that sells nutrition products, has become one of the most controversial stocks lately.
Hedge fund manager Bill Ackman, the founder of Pershing Square Capital Management, is shorting more than 20 million shares of HLF calling the company a "pyramid scheme."
On the long side, hedge funder Daniel Loeb, the founder Third Point LLC, disclosed a 8.24% stake in the company. Loeb thinks Ackman's pyramid scheme claim is "preposterous."
The stock has now returned above the pre-Ackman short levels. It's definitely been an interesting hedge fund battle to watch.
As part of his short, Ackman launched an exhaustive website FactsAboutHerbalife.com with supporting materials for his short thesis.
In one of the sections of the site, he features a presentation given by Doran Andry, a "Chairman's Club Member" of Herbalife who has been a distributor since 1988.
In Andry's presentation about "Nutrition Clubs" given at Herbalife's Leadership Development Weekend in April 2011, he shows how becoming a distributor changed his life and helped his dreams come true.
To demonstrate this, Andry shows photos of his gorgeous $30 million custom mansion, his fleet of luxury rides, his more toned physique, his family's exotic vacations around the world as well as their extensive global charity work.
We've included his presentation in the slides that follow.
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The world's greatest short-seller Jim Chanos, the founder of Kynikos Associates, weighed in on the hedge fund war between Bill Ackman (Pershing Square) and Daniel Loeb (Third Point) over Herbalife in an interview with ReutersTV.
Ackman revealed last month that he's shorting more than 20 million shares of Herbalife calling it a "pyramid scheme." He has a price target of zero and believes the company is going to fail.
Loeb's Third Point recently disclosed a 8.24% stake in Herbalife. In a letter to investors Loeb called Ackman's pyramid scheme allegation "preposterous."
"I think that at the end of the day the Herbalife bull-bear battle will result on who can prove the fact of whether or not the business proposition is good," Chanos said in an interview with Reuters TV.
"Now, I know there are a number of bulls in the company who think 'this is nothing more than a glorified 12-Step program or it's a way for weight loss,' but I'm a little skeptical about that argument as well because there are so many competing venues for weight loss not the least of which are companies like Weight Watchers and Jenny Craig and others that don't have the multi-level marketing aspect," he added.
Chanos hasn't publicly commented on Herbalife. He declined to say if he will do so at some point, but he did say that he's studied the MLM industry.
Check out this video with Reuters TV:
Herbalife's stock is now trading above the pre-Ackman short levels.
Since December 18, the trading session before Ackman confirmed his short, shares of Herbalife have moved up more than 6%. On December 24, the stock hit a 52-week low of $24.24 a share and have since rallied back.
The stock was last trading down more than 1% today.
SEE: 14 Quotes From Jim Chanos That Show Why He's The Most Successful Short Seller In The World >
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Activist investor Dan Loeb is short a multi-level marketing firm called Nu Skin, the NY Post reports.
It's a firm whose fate has been somewhat tied to Herbalife's since investor David Einhorn jumped on an Herbalife earnings call last spring, and asked three questions that sent the stock plummeting.
It may seem like an odd position, as Loeb announced earlier this month that he's long Herbalife, contrary to his fellow fund manager Bill Ackman, who has a massive short position in the stock.
...Third Point takes a dim view of fellow multilevel-marketing company Nu Skin, whose stock trades in tandem with Herbalife. Third Point took a sizable short position in Nu Skin, which sells anti-aging products, after it began researching the company in the summer of 2011, said a source familiar with the situation who is neither long nor short in either company.
The firm may have traded in and out of the position but was short as of last week, the source said.
Per CNBC, Nu Skin stock is down 3.76% in pre market trading.
When Einhorn questioned Herbalife back in May, Nu Skin shares tanked from $60 to $42 just because investors knew that the two companies shared the same business model.
And a defamation suit filed in Salt Lake City, Utah by an ex-husband of Nu Skin founder Sandie Tillotson, suggests that the companies may share the same problems that Ackman alleges as well.
Nu Skin shares (NUS) fell after an ex-husband of founder Sandie Tillotson allegedly disparaged her to "Wall Street insiders." Tillotson is an executive vice present and the largest individual shareholder of Nu Skin, a Provo, Utah-based outfit that sells its beauty products through thousands of independent distributors. Like other multilevel sales operations, Nu Skin exhorts distributors to recruit others who will, in turn, recruit recruits devoted to ordering company products. However, as we reported in our earlier story, regulatory filings indicate that most distributors never make a profit.
The lack of profit is exactly what Einhorn suggested on his Herbalife call, and it's what sent Nu Skin stock down 9.06% when Ackman announced his Herbalife short in December.
Another bearish voice in this conversation is Citron Research. Earlier this year Nu Skin said that China comprised almost 75% of its year-over-year revenue growth in Q2 alone, and that it expected more growth there and in other emerging markets.
The problem with that, Citron pointed out, is that multi-level marketing firms are illegal in China, so the firm is skeptical of Nu Skin's continued growth there.
Click here for Loeb's long thesis on Herbalife>
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