If you are a normal person, you’ve probably been busy with the holidays, shopping for gifts or going to office holiday parties. If you are little weird like me, you’ve been fascinated by Bill Ackman and his billion dollar stock market bet that Herbalife is a pyramid scheme. There are a lot of over-embellished titles used for articles in the media, but this Business Insider title of We Have Never Seen Anything Like Bill Ackman’s Dizzying Takedown Of Herbalife is dead on.
A few months ago, Einhorn asked some innocent questions on a conference call that sent the stock reeling. Many inverstors attributed the drop in stock price because Einhorn famously bets against stocks and his presense could suggest trouble. What people missed is that Einhorn was very cleverly asking Herbalife if they are a pyramid scheme by trying to find out sales of product to people outside of Herbalife (a key measuring stick) and Herbalife’s response was that they didn’t know.
Wall Street isn’t educated in MLMs and pyramid schemes, they just understand profits, losses, and other financial metrics. The news organizations missed what Einhorn was saying and focused on it being Einhorn that was saying it.
Enter Bill Ackman, his dizzying presentation, and the fallout. I’ve been reading and commenting on the articles at SeekingAlpha and have been amazed by how many people seem to not understand the most basic of concepts. Perhaps they do understand them, but because they own the stock, they are forced to come up with conspiracy theories that simply don’t make sense.
Like with Einhorn a great number of people have missed the point. Mr. Ackman doesn’t typically bet against companies. That made it a little more difficult for Herbalife supporters to ignore the message and attack the messenger. However, those supporters still tried to claim that Ackman is just trying to slam a company to line his own profits. Ackman is on record saying that the money made is going to charity. The supporters claim that Ackman is still going to gain personal notoriety from this. Of course he will. If a policeman catches a criminal, he “risks” becoming a hero. It doesn’t mean that policemen should just criminals go, because it is a terrible thing to be seen as a hero.
The presentation itself, Who Wants to be a Millionaire is so in depth that I can’t adequately cover it in this space. I have about 5,000 words typed up on the 334 slides, but I think such commentary would be best put it bite sized posts on another website. Perhaps I’ll do that soon.
However, if you’ve ever been curious as to how these MLM work and how they harm society, I implore you to see the presentation.
One of the things that I thought that was most interesting was at the beginning where Ackman shows Herbalife products are not priced competitively with other similar products in the marketplace and that they are commodities, nothing deserving such a premium. The mail me if you want to hire a competent person.
How Difficult is it to Understand Herbalife? Not Even the Wall Street Analysts Know What They are Talking About
On page 2 of this Business Week article, there are a couple of analysts giving their opinion:
- Tim Ramey analyst for D.A. Davidson & Co. – “Ackman gets an ‘A’ for effort and style points… not much substance in our view.” If the above isn’t full of substance with very specific references to the FTC’s definition for pyramid schemes and why HerbaLife runs afoul of them, I don’t know what else to say.
The article attributes the following to Ramey, “Ackman misses the fact that Herbalife sells a premium product to a growing number of individual users in the midst of a global trend toward healthier foods and weight loss.” Actually Ackman addresses the product quality in great detail showing that they are commodity product with no meaningful research and development or innovation. Furthermore in a room of Wall Street executives almost no one had heard of their top product, Formula 1. These people are paid quite well should be the very target of a company that sells a premium product. Tiffany’s is viewed as a premium diamond retailer and I’m sure they’ve heard of them and have some of their products. They are probably also familiar with Mercedes and BMW.
The point about sales to individual users and the global trends are inconsequential as to whether it is pyramid scheme. It is simply puzzling why an analyst would make this point and ignore addressing the information in the presentation.
Then again, in my previous Herbalife article, Ramey suggested that people should buy HLF stock hand-over fist given the sell off to $50. Those people would now own a $27 stock.
- Linda Bolton Weiser analyst for B. Riley & Co. – “The product is sold to people, people do use it, he included very little of that aspect.” Bolton Weiser is a HerbaLife distributor which hardly makes her unbiased, but let’s put that aside for a moment. She misses the point that when it comes to pyramid schemes, it is irrelevant if the product is sold to people and they use it. No one contends that point, but it is a red herring.
Then she goes on to tell a boldface lie, “His claim is that nobody is buying it at all. He literally said at one point there’s almost no retail sales going on. That’s a very odd statement to make.”
Ackman never makes the point that nobody is buying the product at all. Since Ms. Bolton Weiser is an MLM distributor (she’s signed a distributor agreement), she should know retail sales are sales of the product to people who aren’t distributors at retail prices. What he is saying that the people who buy the product are like Ms. Bolton Weiser, distributors buying the product at a discount rather than buying the product from a distributor at the suggested retail price.
The FTC makes a big point that “In a pyramid scheme there is almost no emphasis on making retail sales of products to persons who are not participants in the program.”
If you understand the rules of MLMs and pyramid schemes as an MLM distributor and an analyst covering an MLM company, you know that Ackman’s statements are NOT very odd. They are directly in line with the FTC’s requirements to be a legit company.
Finally, just because I really liked these videos of Ackman stating that he’s trying to help consumers here’s a CNBC video and a Bloomberg one. Before I give you the videos though, I’d like to finish with one thought.
Herbalife hasn’t responded to the presentation. They said they’ll get around to it on the 7th of January. If it were me, I’d address the fact that my company has lost shareholders some 5 billion dollars and 60% of its value in 7 months. I’d probably also look into distributing my product in a way that doesn’t get compared to a pyramid scheme. Apple and McDonalds doesn’t have these problems. I may be Lazy, but I’m not irresponsible.
Gillian @ Money After Graduation says
Really interesting information! I’m glad someone is working to expose this. I feel sorry for people who fall for pyramid schemes.
I am a nerd too and actually have been following this story. It is truly amazing. I spent the last couple of days reading through the entire presentation and watching the three hour presentation. Excellent work!
I really think it is really on point.
Lazy Man says
Hmmm, I guess Ms. Weiser realized that MLMs aren’t here specialty: “B Riley analyst Linda Weiser — who had a $101 price target on the stock — told clients that she is dropping coverage of Herbalife.”
Tommy Z says
Excellent article again, Lazy Man!
This is epic. I hope. Ackman states time and time again that the target of these pyramid schemes are low income people or people that have just lost their jobs etc. and that, as we know, is very true. I am concerned that these very people he is trying to protect (in terms of those that are already locked in) are manipulated into not trusting the government, throwing away their T.V.s and told not to read the newspaper. I just hope that this story reaches such massive proportions that it will be hard to ignore or avoid and they get out before too much damage is done.
Great article Lazy. I am sure that you will continue to keep us informed!
Merry Christmas to you and your family!
@ humiliated, if Hebralife teaches it’s followers to “not trust the government, throw away their T.V.s and are told not to read the newspaper,” then I have a new found respect for this organization. I’d suggest far more damage and brainwashing is done by our corrupt government the complicit corporate mass media propagandists then all MLM’s combined.
Ackman’s presentation is a thing of beauty. So nice to see someone who can get a lot of attention in the press understands what a scam MLMs are. Really put a smile on my face. Now if they FTC would only take action. I’m not too hopeful on that score–what do you think Lazy Man? Do you think this will affect Herbalife and the MLM industry at all in the long run?
Ackman’s got a billion dollars riding on this, he’s not going to sit back and wait to see if the FTC takes notice. He’s hired a couple top knotch law firms. He’s going to press the FTC to take notice as hard as possible. He is a very public figure and this is going to continue to gather the attention of the media.
While he does reserve the right to change his position at any time, he has said he believes the ultimate price is zero. I don’t think he’s letting it go any time soon.
I think this has already affected the MLM industry. The management and top distributors of these product based pyramid schemes should be very concerned.
You know I love a good MLM Crash story but the only thing I dislike is that he told everyone. If I *knew* X was going to happen and I can profit 30,000% Why would I share that with anyone? So if he knew HLF was going to crash eventually why tell everyone? To profit quicker?
Lazy Man says
Well, he’s donating the money to charity. In interviews with CNBC he’s said that he’s trying to get the word out to the distributors at the bottom before they re-up for January’s qualification month.
Also, there’s this concept that Herbalife could be a sustainable pyramid scheme for a large number of years. The idea is that they just replace the bottom people every year and new bottom people come in. It’s small enough to keep churning through people for a number of years. It’s really the answer to how a pyramid scheme could exist for 32 years, which is HLF’s most common defense.
He still profits if money is donated to charity through his tax deductions – however I am not that cynical to believe that was his motivating factor.
The move just leaves a bad taste in my mouth. Sort of like Buffet buying a HUGE chunk of ABC then announcing the next day that he bought a huge chunk of ABC only to sell it a few months later.
Lazy Man says
So if he is right, then he potentially can profit a little through tax deductions. If he’s wrong, he loses the money outright. Very minimal upside and very large downside.
I also think it’s a bit different when the person makes fraud allegations AND provides proof, which is what Ackman has done. He is prepared for a legal battle with Herbalife if necessary.
It’s far different than Buffett just buying ABC and then announcing it the next day. That would be just the market reacting on Buffett’s name and his reputation. This is the market reacting to very strong proof in my opinion.
I’m not sure what more you can ask from Ackman.
Ackman may be right but I’ve taken the other side. You’re betting on the government doing something, which is never a good bet. Also, it can be disputed that this is not a pyramid scheme. The fact that Ackman’s comments are not indisputable means that this will take the government years to figure out, if the government even does something. More importantly, only 20% of rev come from US. So India, Brazil, Mexico etc have to ban the product? Hmmm. Also, most importantly, this could all end in tears via short squeeze. He’s short 25% of the float. That is just scary. This could easily be the demise of Ackman. People forget he was WRONG about MBIA back in 02.
Lazy Man says
I don’t think you are necessarily betting on the government doing something. I heard that line when Einhorn showed up at the conference call in May. The government didn’t have to do anything and the stock still lost a bunch of money when Ackman showed up. So what happens if another hedge fund guy opens his mouth?
I don’t think there’s any such thing as an undisputed pyramid scheme. I think even Bernie Madoff disputed that he was doing anything illegal. Even if it takes years for the government to figure it out, no one knows how long the FTC might have been working on it already. They could make an announce tomorrow and I’m pretty sure you’d lose half your money.
And yes, if the US finds it illegal, it is very likely that the facts of the come from that lead to the other countries taking similar action.
I wouldn’t worry about Ackman, he would be fine if Herbalife went to $300.
I don’t remember Ackman accusing MBIA of being a pyramid scheme in ’02 ;-). I’m not really familiar with MBIA, but from this Wikipedia article it seems like he was right having predicted the bank collapse due to mortgage CDOs. It also seems like he made a lot of money with the call. Am I misinterpreting this?
Even so, it clearly looks like Herbalife is wrong here. This CNBC article sums up how Herbalife has changed their story about sales to people outside the network (a key deciding factor according to the FTC) multiples times. They went from “we don’t know and don’t think it is important”, to “a majority of our sales are to distributors who we believe should be categorized as discount buyers” (note that they would be categorized as inside the network according to the FTC since they sign distributor agreements) to “90% of percent of sales are to people outside the network” (quotes are paraphrased).
It is like an accused person changing their alibi multiple times. That wouldn’t be a company’s stock I would want to own.
I don’t know the answer to this, but if HLF were found to be an illigal pyramid, I would think the company would be delisted. Wouldn’t this effectively make the price zero? I suppose the company could go on as it is based in the Caymans, but that may then be reorganized as a totally different company. If this wasn’t the case and current shareholders retained equity, how would they sell a delisted share? Would it be illegal to buy or sell the shares of a company that has been deemed to be an illegal scheme in the United States if it did list overseas? This is fascinating. Any thoughts?
Lazy Man says
That’s a good point DTM. I can’t imagine the SEC allowing an illegal pyramid scheme to be traded on the US stock market. In theory they could jump to an international exchange that they are still legal in (maybe Japan or something) and convert US shares to those shares. I can’t imagine it would be illegal for US shareholders to buy or sell it in that case. You might just have to get a overseas brokerage account and I’m not sure how that works reporting profits to the IRS.
As their price got effectively close to zero, I would also imagine that Herbalife would consider buying back the stock to take it private. I really wouldn’t know how that works (if they can just recall the stock against the will of the shareholder like that). At that point, they could continue their business like many of the private MLMs.