Why William Ackman of Pershing Square failed to crush Herbalife



Ackman’s missing “death blow”

The move of William Ackman from Pershing Square Capital Management to deliver a “death blow” to Herbalife Ltd. (HLF) on Tuesday didn’t have the desired impact. In fact, the shares of the nutritional supplement company surged more than 25% by market close. The shares had plunged 11% on Monday after Ackman told CNBC that he would reveal an “Enron-like fraud” at the company and that the company would “collapse.”

HLF share price

Herbalife is a global nutrition company that sells:

  • Weight management products
  • Nutritional supplements
  • Energy, sports, and fitness products
  • Personal care products

Ackman has pursued Herbalife since December 2012 when he issued and presented a critical research report on Herbalife’s multilevel marketing business model. He accused the company of being a “pyramid scheme” that would be shut down.

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Ackman also disclosed that he was shorting 20 million shares, or $1 billion worth, of Herbalife stocks with a price target of $0. In an investor letter last year, Ackman said the fund has “restructured the (Herbalife) position by reducing its short equity position by more than 40% and replacing it with long-term derivatives, principally over the counter put options” to “mitigate the risk of further mark-to-market losses on Herbalife.”

When asked about the recent gains in Herbalife’s stock price during the presentation, the hedge fund manager claimed the company was repurchasing shares to raise the price. He added that Herbalife “can only prop up the stock for so long.” Herbalife’s stock is down around 15% year to date but up around 60% since December 2012 when Ackman first revealed his billion-dollar bet. News reports, which cited analysts, stated that Tuesday’s share price increase was a “short squeeze.”

Herbalife’s business practices under investigation

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Ackman’s campaign has prompted investigations into the company’s business practices by the Federal Trade Commission, the U.S. Securities and Exchange Commission, the U.S. Department of Justice, the Federal Bureau of Investigation, and even Canadian regulators. Some analysts are bullish on the stock due to the business model and potential expansion in emerging markets. But, others remain cautious about concerns of regulatory risk.

Herbalife has denied Ackman’s allegations and has previously said that Ackman’s campaign was a “cynical, self-serving attempt to manipulate the market by buying his way into an investigation to cover his own reckless $1 billion dollar bet.”

In response to the presentation and the resulting share price gain, Herbalife said that “Bill Ackman has once again over-promised and under-delivered on his $1 billion bet against our company. After spending $50 million, two years and tens of thousands of man-hours, Bill Ackman further demonstrated today that the facts are on our side.”

The company added that, “We recognize that he is running out of time to make good on his bad bet against Herbalife, with the equivalent of 25.7 million shares in put options that expire on January 17, 2015.”

Besides Herbalife, some of the known multilevel marketing companies include Nu Skin Enterprises, Inc., (NUS), Usana Health Sciences, Inc., (USNA), Avon Products, Inc., (AVP), Tupperware Brands Corporation (TUP), and Amway.


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