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Herbalife Battle Royale
Published: Wednesday, March 6, 2013
Updated: Wednesday, March 6, 2013 09:03
The Gordon Gecko stereotype of finance is far from the truth these days. Huge bonuses and shiny glass buildings remain, but the public spats that gave Wall Street its gritty image in the 1980s have been largely replaced by executives begging for government aid and CEOs put on trial.
But, perhaps just for old time’s sake, Pershing Square’s Bill Ackman and famed corporate crusader Carl Icahn have entered into a public street-fight for the ages. The prize? Being right about a smoothie company called Herbalife, and probably half a billion dollars.
Herbalife sells nutrition and personal care products through representatives and sales people across the country. These salespeople make money from both selling the products, and recruiting other salespeople.
This strategy is known as “multi-level marketing,” or more fittingly, “pyramid selling.” Pyramid selling creates an incentive to both sell products and recruit more salespeople, and has been successfully implemented by other personal health manufacturers like Avon and Amway.
Ackman, however, believes that Herbalife incentivizes the recruitment of salespeople far more than the actual sale of merchandise — essentially calling it a pyramid scheme. In a 300 slide PowerPoint presentation that would make TFG ooh-and-ahh, Ackman argued that Herbalife makes its money by selling these “distributorships,” not the actual products, leaving most distributors with few customers and little cash flow, and the company with a finite lifespan.
Herbalife, of course, has vehemently denied Ackman’s claims, noting that 90 percent of the people who buy Herbalife products are customers, not distributors, and that a pyramid scheme of this scale simply would not be sustainable for the life of the 30-year-old company.
Ackman announced in mid-December that he had put on a massive 20 million share short on the company’s stock — standing to make $1 billion if the company collapsed.
Ackman set a price target of $0 — the equivalent of bankruptcy — for Herbalife, and the stock took an initial plunge of 40 percent in the weeks after Ackman’s announcement. But then two prominent hedge funds, Daniel Loeb’s Third Point Capital and Carl Icahn’s Icahn Enterprises, decided to take the opposite view on the company.
Loeb believed that the market had tremendously undervalued Herbalife, and after announcing his firm’s eight percent stake in the company in January, shares skyrocketed 76 percent in just three weeks.
Icahn also saw room for a turnaround, and took a nearly 13 percent share of the company, but Icahn’s position runs deeper than the Herbalife.
Ackman and Icahn have had a smoldering feud for the past 10 years, dating back to a realty company merger that Icahn had cut Ackman out of. Ackman later sued Icahn for $9 million and won.
Both Ackman and Icahn had traded remarks through various news outlets since their respective Herbalife trades had been announced, but their battle came to a head in what Business Insider rightfully deemed “The Greatest Moment in Financial TV History.”
Icahn began the sort of unabashed quip you would expect from the 77-year-old Queens native: “You know, I’ve really sort of had it with this guy Ackman.” Over the next half-hour, Ackman and Icahn would trade investment theses and then some — Icahn compared Ackman to a bullied schoolboy, decried his investment style, and cursed multiple times on air, to which traders on the floor of the NYSE responded with lively applause.