There’s an interesting event taking place in the activism world: Bill Ackman is attempting to use every weapon that Washington has to bring down Herbalife, a vitamin a health supplement company. I’m sure most of you have heard the story – Ackman is accusing Herbalife of being a pyramid scheme that stays afloat by means of recruiting new distributors, many of whom are low-income individuals. Fraud reports and business investigations are common, but what makes this case interesting is that Ackman’s hedge fund recently took a $1B short position that will only pay off if Herbalife’s stock drops. Ackman’s attack, the value of the attack, and the lobbying attempt at hand is unprecedented in its scale.
Ackman has pressured state and federal regulators to investigate Herbalife by helping organize protests, news conferences, and letter-writing campaigns in California, Nevada, Connecticut, New York and Illinois. His team has also paid civil rights organizations at least $130,000 to join his effort by helping him collect the names of people who claim Herbalife victimized them, doing so to send the reports to regulators. Ackman’s team also provided the money used by some of these individuals to travel to Washington to participate in a rally’s against Herbalife. Ackman has presented investigators in New York with a year’s worth of financial research that he said showed that Herbalife was misleading investors by failing to disclose that most of its sales were generated by simply recruiting more distributors, rather than by selling large amounts of its product to consumers.
Nevertheless, Herbalife has grown into a powerhouse, with a worldwide team of more than 3 million members and distributors who operate as independent contractors through a system that rewards many of them not only based on actual sales, but also on their ability to recruit more distributors. Currently, Ackman has little to show for his fight: Herbalife’s stock has climbed higher over the years, which is partly due to billionaire investor Carl C. Icahn buying a large stake in the company. In addition, regulators lobbied by Mr. Ackman have not taken any formal action against the company.
While this is not “traditional” activism – traditional meaning a large institutional shareholder using its power to influence and make decisions, such as proposed M&A, compensation, and other strategy – Ackman is trying to find a way to undermine public confidence in Herbalife so that his $1 billion bet will produce an equally enormous return. What makes Herbalife interesting is that other known activist investors, such as Carl Icahn, are betting that Herbalife will continue to grow. The chart below illustrates how "active" Herbalife has been in the activist investor community.
What are your thoughts? Who will win this battle?
Cheers, Josh
Reference used: http://www.nytimes.com/2014/03/10/business/staking-1-billion-that-herbalife-will-fail-then-ackman-lobbying-to-bring-it-down.html?_r=0
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