I don’t really know what to tell you about Herbalife’s investor day presentation this morning. One thing that’s definitely true is that it was shorter than Bill Ackman’s anti-Herbalife presentation a few weeks ago, which the Herbalife team seemed inordinately proud of, since, like, the Ring Cycle is shorter than Ackman’s presentation. It was … guys, honestly, it was creepy, the word is creepy. Here is where Herbalife’s president, Des Walsh, made me particularly uncomfortable:
“It’s about a shake, a tea, an Aloe — and a hug. I know in this community, hugging is not something you do a lot. But the world needs more hugs. And they find them, along with good nutrition, in the nutrition clubs.”
That’s from DealBook’s live blog, which collects the highlights. (DealBook also has a good breakdown of the legal issues involved in “is Herbalife a scam?”) Ackman has already responded, arguing that Herbalife distorted his arguments and failed to address a lot of his points. This is true, though Herbalife definitely scored some “Ackman-is-distorting-our-business” points too; the whole thing seems likely to become a drawn-out contest of two sides talking past each other, at maximum length.1Read more »
An important truism in the financial markets is that there’s no such thing as a “toxic asset,” tout court; everything is toxic/dangerous/Bad at some (high) price and attractive/safe/Good at some other (much lower) price and there’s a wide area in between where things mostly live and you fight about their pricing. You can apply that insight to junk bonds or CLOs or really any number of things, and you should, but today it’s sort of fun to apply it to Herbalife. As far as I can tell the argument over Herbalife goes something like this:
Herbalife opponents: Herbalife is a horrible pyramid scheme that preys on disenfranchised, mostly poor and minority people and convinces them to part with their life savings through misleading advertising and high-pressure sales techniques. Herbalife supporters: True! And … ? Opponents: And therefore it will be shut down by the FTC and the stock will go to zero. Supporters: That’s … wow, that’s just hopelessly naive. I’m gonna go buy some HLF.
Today CNBC’s Herb Greenberg has a good statement of the “horrible pyramid scheme” case, which of course has been most memorably taken up by Bill Ackman, who is betting a billion dollars on “shut down by the FTC and go to zero.” And last week Bronte Capital’s John Hempton gave the classic statement of the “hopelessly naive” case.1 As one Herbalife shareholder put it when I asked if he thinks HLF is a pyramid scheme, “in the colloquial sense, yes; in the legal sense, no.”2
Well, the praise was brief but extravagant, specifically “this is the best managed pyramid scheme in the history of the world,” which I at least would be proud to have on my resume, but I might be in the minority there. What do you think Ackman’s goal was in this morning’s 340-slide, nineteen-hour Herbalife presentation featuring phrases like “Shane’s going to come up here and talk about the accounting again” and “now I’m going to bring on our lawyer for the next 200 slides” and “here’s where it gets really interesting: shipping and handling,” and, at the 2 hour 28 minute mark, “feel free to go to the men’s room, ladies’ room, it’s at the top of the stairs, but I’ll keep going”?1 Ackman thanks several team members for working tirelessly for a year or more on this presentation, and if you watched all of it you have a pretty good sense of how they must have felt.
One model of this fight is that Ackman and Herbalife are attempting to wage regulatory battle by proxy. Presumably some SEC and FTC lawyers are watching this and the respective hopes are:
Ackman hopes that the Federal Trade Commission will conclude that Herbalife is a pyramid scheme and shut it down, bringing the stock to zero-ish and making him a zillion dollars on his short position, and
Herbalife hopes that the SEC will conclude that Pershing Square is a market-manipulation scheme and shut it down, causing HLF’s stock to soar.2
Neither, either, or both of these things could happen, I suppose; the FTC and the SEC are their own dogs and so you could have each running around investigating one of the protagonists here. But generally relying on a regulator is sort of a dicey proposition; even if you’re right, the regulator may have better, or possibly worse, things to do with its time than inflicting pain on your adversaries. So what does that leave you? Read more »