The long-awaited happened and the U.S. Federal Trade Commission (FTC) announced few weeks ago that it had opened an investigation on Herbalife. The details have not been publicized but looking to all what has been happening in the last two years, it’s not hard to guess: FTC wants to find out if Herbalife is a pyramid scheme.
Let’s go back a little to see how we ended up here…
Pershing Square is a “hedge fund”. A hedge fund is an aggressively managed fund that uses advanced investment strategies like leveraged, long, short and derivative positions, that are not very familiar to many of us. Bill Ackman is the founder and CEO of Pershing Square. In December 2012, Bill Ackman gave a presentation. What he said in essence was that, believing Herbalife was nothing but a pyramid, Herbalife’s share value would soon be “zero”. So, he had “short-sold” Herbalife shares. Later, he also said he had invested in his bet an amount between $400-500 million.
However, things did not evolved as Bill Ackman would have expected. First of all, Herbalife continued its impressive growth, globally. The company’s net sales increase was 18% in 2010, 26% in 2011, 18% in 2012 and most recently, 19% in 2013. Moreover, Herbalife’s profitability has been problem-free as well. Consequently, company’s share that was valued $20 at the end of 2009, was being traded at $79 at the end of 2013. This means Herbalife investors quadrupled their investments in four years!
In the meanwhile, another prominent investor, 77-year-old Carl Icahn entered the scene. Contrary to what Bill Ackman had been advocating, he said Herbalife’s was a solid business so its shares would gain further value. Carl Icahn bought 16.5% of Herbalife’s shares. Another publicly-known figure, George Soros joined Icahn in buying Herbalife shares.
While all these were happening, Bill Ackman did not choose to wait and see. Rather, he continued his attacks through various presentations, statements to reporters and appearances on TV channels. Obviously, he would only make a profit if he would be able to take Herbalife share’s value to lower than what he had bought.
The U.S. Federal Trade Commission did what it had to do after all this fuss and announced it had opened an investigation. Some people think this will damage the industry severly. I tend to think the opposite.
This investigation is not expected to end before one or two years. Naturally, Herbalife will continue to operate and looking at its past performances, will continue to grow. In the end, I expect nothing but a relief for Herbalife. Just like the infamous FTC vs. Amway decision made in 1979, this will way the pave for all other legitimate direct selling companies, too.
As a response to all these, Herbalife has made several attempts to prove Bill Ackman’s accusations were groundless and has recently unveiled a “public awareness website”. The website intends to feature success stories from Herbalife members and their customers, and addresses misinformation about its business model. If Herbalife had been more transparent before, would that stop Bill Ackman’s move? I think this is not a relevant question at this point as we just don’t know that. However, the key take-away from this whole thing for all of the players in this industry is that we all need more transparency to preempt unfair attacks.
In a memo sent to Herbalife employees, company’s CEO Michael O. Johnson said FTC’s inquiry was a “positive development”. I agree with him!