Corporate raider David Ackman attacks venerable company. A threat to the industry?

ackman1You’ll recall earlier this year we wrote about a recent wave of assaults on our industry by stock manipulators. The attacks have only intensified and are now settling in at Herbalife, this time from short seller David Ackman.

Ackman, head of Pershing Square Capital, fancies himself a patriot, and says putting the company out of business would be “good for the country.” Doubtful, but we do know it would be really good for David Ackman, who has taken a huge negative position against the company. Shares in HBL are down 38% in the last three months.

To be sure, Ackman does know a bit about pyramid schemes. In 2009 he defended Ezra Merkin, who was charged with civil fraud by the State of New York for secretly steering $2.4 billion in client money into Bernie Madoff’s Ponzi scheme.

Ackman’s viewpoint completely misses the revolution that is social selling. He sits on the board of JCP and is a major shareholder in Target and Borders, retailers, who of course are threatened by the massive shift toward people selling to other people. Think this might be another motivator for Ackman?

More recently, Ackman has bet the farm that he can put enough doubt in investors’ minds that he can run the company down and make billions in profit. Forget the millions of Herbalife distributors or the 91+ million other direct sellers and their families worldwide who depend on the extra income direct selling companies provide.

I just spent the better part of an afternoon reviewing Ackman’s 132-page presentation (posted by our friend Kevin Thompson) which took aim at not just a few claims or missing financial information, but at the entire network marketing business model. Some of the presentation’s points naturally make sense, and Herbalife’s compliance team should take a good look at them. But the rest of the document is a short-seller’s argument made not in the interest of patriotism, but to move the stock down for a trading profit.

Ackman’s lack of regard for the people of the direct selling industry, its distributors, manufacturers, and employees is reckless and irresponsible.

So what do we know about Ackman?

  1. His preferred way to make money is to sell a stock short, drum up negative information on it and rally the media.
  2. Reports are he shorted Herbalife a billion (with a B!) dollars worth of stock prior to his attack. A billion! With such high stakes, he must put them out of business. Which, incidentally, is his stated intention – “drive the stock to zero.”
  3. He released his scathing review the day before a large number of “puts” expired on the stock, making his motivations obvious.
  4. Shockingly, ten years ago Ackman’s old fund, the failed Gotham Partners, wrote a defense of multi-level marketing called “A Recommendation for Pre-Paid Legal Services, Inc”. He was a major investor in Pre-Paid and wanted to see the stock rise so he could profit. It did, and he did.
  5. He is the largest investor in JC Penney, which is struggling significantly. Recently in what was described as a “trainwreck” interview on CNBC, he tried to put lipstick on the pig by “Apple”-izing JCP to investors, a questionable idea as interviewer Andrew Ross Sorkin tried to point out. Sales down 26% in one quarter? Thanks for the stock tip, Dave, we’ll pass.
  6. He even took on his own mother-in-law when selling his 12 million mansion. He lost that battle, which was in the end probably good for him.

One of the cornerstones of Ackman’s argument is his comparison of cheap, off-the-shelf products like vitamins and stating they are “commodities” comparable to Herbalife’s products, and are therefore not unique. Anyone who shops anywhere knows that nutritional products are all over the spectrum in price, quality and consistency. It’s ridiculous to try to pin them all as the same. Products in our industry are in most cases far superior to those in stores. They have to be so that people are compelled enough to use and sell them.

His assertions about Herbalife are in some cases laughable. For instance, because its products are not a household name (like Centrum Silver or Ensure), Herbalife itself could not be a real “brand”. He also has a problem with the fact the the company doesn’t spend a lot on advertising so does not justify higher prices, that the money that would have gone to ads went to distributors instead. Well duh! That’s the point.

Ackman clearly doesn’t get our model. He thinks networking is best compared with Kellogg’s and GNC stores. His worldview is that of a Harvard guy who lives on Wall Street; he hasn’t lived in this business, doesn’t understand how it works on the ground nor who the stakeholders really are.

His viewpoint completely misses the revolution that is social selling. He sits on the board of JCP and is a major shareholder in Target and Borders, retailers, who of course are threatened by the massive shift in commerce toward people selling to other people. Think this might be another of his motivators?

Opportunists like Ackman who can make money spreading falsehoods and misrepresentations will get away with it until people see the claims for what they are. No doubt he and his ilk are making a killing on this negativity. It’s important to understand they are merely profiteers and couldn’t care less about the people they hurt.

But ultimately, this controversy isn’t about the direct selling business model, it’s about the short selling business model: Scare the markets about the impeding “collapse” of this enormously successful 30-year old company, crush people’s hopes and dreams, and laugh all the way to the bank.

Shameful.

Disclosure: I don’t own shares nor does our firm do work for Herbalife.

2 Comments

  1. Kevin Thompson

    Great commentary, Jonathan. I really think Ackman bit off more than he can chew. I’ve heard that his behavior is unprecedented. He’s on a mission to bring down the company. He’s even buying Google adwords, directing traffic to his site that’s critical on Herbalife. When has a short seller gone to such lengths? The smart short sellers focus on objective data, betting that a company fails due to poor management, economics, etc. But with Ackman, he relies on old, anti-MLM arguments while betting / hoping that the FTC will close Herbalife down.

    Herbalife’s financials are in GREAT shape. On paper, it’s a great buy RIGHT NOW. Based on what I’ve learned recently about short selling, this could really blow up in his face. Check out this guest post on my site, written by a hedge fund guy. He’s buying HLF right now in gobs.

    http://thompsonburton.com/mlmattorney/2013/01/01/herbalife-why-i-made-it-a-35-position-after-the-bill-ackman-bear-raid/

    • Jonathan Gilliam

      Kevin–insightful comments as usual. Think maybe Ackman’s indeed may have merely created a buying opportunity for savvy investors. Last I looked at the at stock it was trending upward.

      Thanks and keep us abreast of what you learn!

      jg

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