As investment “shorts” go, the short against Herbalife perpetrated by Bill Ackman and his company Pershing Square has turned out to be legendary in its failure. I’ve written about it before, but thought it was time for an update.
On September 9, 2015, Fortune reported that “at about 2 p.m. on Wednesday, Dec. 19, 2012, CNBC’s Kate Kelly broke the news that billionaire Bill Ackman’s hedge fund had taken a massive short position—about $1 billion worth we know now—in the stock of a nutrition company called Herbalife (HLF, -0.62%). He considered it to be a pyramid scheme, Kelly continued, “and would be presenting details the next day. Herbalife stock then fell 10% in six seconds, triggering circuit breakers and a temporary trading halt.” Since 2012, Ackman has been hiring lobbyists and public relations firms in an effort to instigate a government investigation of the company in an effort to beat the company into bankruptcy.
The FTC reacted to all those lobbyists and PR firms and investigated Herbalife, Ackman, in essence, using the government as a weapon to destroy the company and make good on his short bet. At this point, Ackman appeared to be on his way to victory.
Herbalife “went to the mattresses” as they say. It revamped its business model, made sure everything it was doing was on the up and up, took untold financial hits from the FTC attack, but has emerged leaner, meaner, and profitable. Not the outcome that Bill Ackman hoped for, and the saga continues to drag on.
The New York Times reported on June 2, 2015, “It is a wager that Mr. Ackman has pledged to ‘take to the end of the earth’ and one that will ultimately depend on whether the government punishes Herbalife.”
Pershing Square Management’s Founder Bill Ackman likely has the record for the worst performing public short bet of a company stock, and now the longest one. Ackman has fought a five-year long war against Herbalife in an effort to destroy the company for profit and he has pivoted his “short” into “outright put positions” on the future of the company. Many have complained about Ackman’s use of the “backroom deal”, his abuse of government power to force a failed investigation using the Federal Trade Commission (FTC) to attempt to push the company into bankruptcy.
Ackman has doubled down and paid the piper. An ABC news piece from 2014 accused Ackman of “paying a ‘whistleblower’ as much as $3.6 million over 10 years if he could help provide damaging information about the company to the government.”
Herbalife has also paid a heavy price in the ongoing war. On July 15, 2016, the New York Times reported in a story titled “Herbalife Settlement With F.T.C. Ends Billionaires’ Battle, “
federal regulators imposed stiff sanctions on Herbalife for deceiving buyers and sellers of its products but stopped short of shutting down the company. Mr. Ackman had wagered big on Herbalife’s demise, while Mr. Icahn had been betting on its ultimate survival. In a settlement with the Federal Trade Commission, Herbalife will pay $200 million in consumer relief, hire an outside monitor and make substantial changes to its business practices in the United States that could affect its bottom line, but the company will continue to operate.
And continue to operate they have. Earlier this year, Herbalife reported the Federal Trade Commission has found it to be in full compliance with the agreement. It said 90 percent of its 3 million retail transactions in the U.S. sales were documented purchases by consumers (as opposed to distributors), which exceeds the 80 percent threshold called for in the company’s agreement with the Federal Trade Commission.
In other words, the firm’s business model not only is legal, it has taken the steps its regulator ordered and obtained a clean bill of health. So, if Herbalife’s business practices have changed and its regulator has signed off, will Ackman back off or at least tell us what this bizarre crusade is all about? Is it something more than the money?
I have to wonder if Mr. Ackman ever has a moment in his quiet, alone time where wonders, “Maybe I should have left Herbalife alone?”
I don’t know what its like to have a billion dollars or to make a bad bet with it, but it looks like it might be time for Mr. Ackman to take his losses and move on.
Image: CC by 2.0; https://www.flickr.com/photos/goherb/6975498090/