What’s Ackman’s Herbalife game?

By Felix Salmon
December 31, 2012

Bill Ackman sure knows how to make a splash: his presentation laying out his Herbalife short is rapidly approaching 3 million pageviews on Business Insider, plus many more from his own website. What’s more, it has already made him a lot of money: even with Herbalife stock up more than 12% today, at about $33 per share, it’s safe to assume that Ackman put on his short at between $45 and $50. If John Hempton is right and the short is on the order of $1 billion, then that means Ackman has made more than $300 million in the past couple of weeks.

And as Michelle Celarier notes, that $300 million is going to come in very handy when Ackman puts together his year-end report, not to mention if and when he ever tries to take Pershing Square public. As of the end of September, his fund was down for the year; Herbalife should change that.

Celarier also notes that Ackman’s broadside was carefully timed: it not only came just before year-end, but also came during a Herbalife “quiet period”, during which the company’s retaliatory arsenal is temporarily depleted.

The amount of sheer theater surrounding Ackman’s short — he literally presented his idea from a stage, and followed up his presentation with a big round of media appearances — makes it clear that the presentation itself is part of the trade. Ackman’s an activist investor, who tries to make money by changing the state of the world, and in this case it’s very clear what change he wants to see: he’d like the US government to prosecute Herbalife for being a pyramid scheme.

Ackman says that he has a price target of zero on Herbalife stock, which is extremely aggressive given that this is a company which makes a lot of money every year. The only way that Herbalife goes to zero is if it gets prosecuted for being a pyramid scheme. But there’s no evidence that a prosecution is forthcoming: after all, Herbalife has been around for 32 years, and the FTC has done nothing so far.

Ackman, when asked, says that the purpose of the theater is to bring the “facts about Herbalife” to the attention of people who would otherwise be duped by its sales pitch: if those people knew the truth, he says, they would never sign up with the company. But there’s basically zero overlap between the kind of people who read 334-page slideshows, on the one hand, and the kind of people who dream of getting rich selling Herbalife products, on the other.

The vast majority of Ackman’s presentation is devoted to an attempt to prove that Herbalife is a pyramid scheme. That’s hard: the distinction between an illegal pyramid scheme, on the one hand, and a legitimate multi-level marketing scheme, on the other, is largely in the eyes of the beholder. All of these things look pretty skeevy from the outside, but that doesn’t make them illegal, and people like Kid Dynamite are doing a good job of chipping away at many of the key bits of Ackman’s presentation.

That’s the bit which doesn’t add up, for me. Ackman has a pretty good short thesis on Herbalife even if it’s a legal MLM operation: he thinks it’s running out of markets and demographics to exploit. But he buries that short thesis inside hundreds of pages of heavy-handed argument on the pyramid-scheme front, and claims loudly that he thinks that Herbalife is going all the way to zero.

The problem is that he doesn’t ever spell out his argument, and explain why he thinks it’s probable that Herbalife is going to zero. After all, in order for that to happen, you need a lot of things to break Ackman’s way:

  1. Ackman has to be right about Herbalife being an illegal pyramid scheme
  2. The FTC has to be persuaded that Ackman is right about Herbalife being an illegal pyramid scheme
  3. The FTC has to then make the decision to prosecute Herbalife
  4. The FTC then needs to win its prosecution against Herbalife
  5. The FTC victory over Herbalife needs to be so decisive that the stock goes all the way to zero.

No matter what probabilities you put on each of these events, the chances of them all happening can’t be particularly high. And the initial one — the determination of whether or not Ackman is right about the pyramid-scheme thing — is not even all that important: you can put that probability at 100%, and you still don’t have a compelling case that Herbalife is going to zero.

All of which makes the Ackman presentation look to me like it’s a lamb dressed up as a lion, and that Celarier might well be right: Ackman could just have been trying to engineer the biggest possible year-end drop rather than genuinely betting on the demise of the entire company. It wouldn’t surprise me in the slightest to see this story go nowhere in 2013, with both Ackman and Herbalife quietly dropping the matter rather than continuing to fight for no good reason. Ackman has made a lot of money on this trade already: it’s not clear that he has any particular need to kill Herbalife as a whole.

The question, of course, is the degree to which Ackman has now covered his shorts, and the degree to which he’s still betting on substantial further declines. It could even be that today’s rise was caused by Ackman taking profits on his trade. After all, it’s always nice to be able to cash such things in, rather than just see them on paper.


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Herbalife, their shareholders and partners, and a big-time short-seller. I think that group deserves each other, and whatever carnage results should remain contained within their boundaries. So put this near the bottom of the list of America’s problems.

Posted by KenG_CA | Report as abusive

Herbalife corporate strategy is “Never Give A Sucker An Even Break”. They deserve to become an inverted Pyramid. The leaders in jail and everyone else getting their money back.

Posted by GaryL.Kaplan | Report as abusive

It is very sad to see everyone bad mouthing Herbalife. Since the time found an empty can and then went directly to sleep my life has totally changed. That night I had wonderful, amazing dreams. In the morning I noticed that my hair was starting to regrow. In the next week I lost 12 lbs eating a diet of spare ribs, potato chips and drinking water that I recycles through an old Mona Vie bottle. Also I no longer need Viagra or a date for any night of the week. Much younger woman now find me irresistible. My car runs better and gets better millage. I no longer think about money. The morning after I heard Herbalife’s name I found a lottery ticket in the street and won a half million dollars.
Strange people on the street stop me asking me for Herbalife, Amway, NuSkin, Monavie and other stuff. I need to find out what they are.
People you just need to let Herbalife name into your soul to be on the doorstep to heaven.
This is not a paid testimonial. In fact I don’t really know what a shake is but just the name has changed my life.
Sent form aboard my Big yacht”Prosperity”

Remember the Herbalife Leader Secret Mantra “Never Give A Sucker An Even Break”

Posted by GaryL.Kaplan | Report as abusive

That not a scheme then great opp. for CEO to purchase bargain HLF shares an make a big buck. But he ain’t buying, is he? Why ain’t he buying?

Posted by GustoDuel | Report as abusive

Ackman comments that this is a pure play for Pershing (no options, swaps, not short other MLM cos, and what I take to mean riding it all the way to where he set his target – 0).

Covering now would hurt his credibility with government agencies, as well as hurt his reputation in the investment community. It would make this short investment seem speculative. I doubt that he is comfortable with the trade of quick profit vs long term reputation. He has bigger ambitions.

He is a patient guy, something he has proved in many long investments, and in particular in his one other big short investment – MBIA.

Therefore I doubt that he is now covering.

Anyone interested in how HLF might play out for Ackman, I recommend reading Confidence Game which chronicles his MBIA investment.

Posted by jaskow | Report as abusive

All this talk about Herbalife is BS. If it wasn’t for Herbalife my husband would had still be taking his meds and over weight. I won’t had lost over 20lbs and lost over 20 – 30 inches around my body. This company has been the best company in the world for both personal and business goals. People like Ackman got screwed years ago because he made a bad deal. All this Pyramid Scheme is an excuse to blame others for his own mistakes. Has Herbalife been perfect? No, but doesn’t every company make mistakes and learn to grow? That is how all companies do, they go up an down all the time in the stock market. Now suppose he has proof, we shall see if he has or if that is a true fact. Ackman – why do you keep putting companies down? Are you bored? If so, there is these awesome islands you can move to and enjoy the billions of dollars you make and stop putting great companies down for no reason. Just doe us that favor and leave before you loose your own followers.

Posted by HerbalifeDist | Report as abusive

That not a scheme then great opp. for CEO to purchase bargain HLF shares an make a big buck. But he ain’t buying, is he? Why ain’t he buying?

Posted by skeeps | Report as abusive