William A. Ackman, the founder of the hedge fund Pershing Square Capital Management, announced his “big short†on Herbalife more than a year ago, and most are still unsure whether he’s right or wrong. You might think that is a problem, but for some of Herbalife’s investors, the truth doesn’t appear to matter much as they have been profiting from the wild swings in the stock price.
If you follow Wall Street in any way, you know about Herbalife. In December 2012, Mr. Ackman announced to great fanfare at an investment conference that Pershing Square had taken a $1 billion short position, betting that the stock price of the company would fall. Mr. Ackman called the company â€" a distributor of nutrition supplements, herbal teas and other products â€" a pyramid scheme.
This was no ordinary short. Mr. Ackman was not claiming that Herbalife’s business was declining. In a 334-slide presentation, Mr. Ackman claimed that Herbalife’s business model was illegal under federal law.
Mr. Ackman said that Herbalife participants made most of their money by recruiting sales people who bought the product themselves and recruited yet more people.
Mr. Ackman’s charges were electric, and Herbalife’s stock plunged. Herbalife came fighting back. The company heatedly denied the claims, instead asserting that while many of its distributors were consumers, Herbalife was not only legitimate but that “there is genuine and strong demand both inside and outside its network for its products.†According to Herbalife, the company’s distributors earn “income only when sales happen,†which by definition cannot be a pyramid scheme.
It’s now a year later, and we still don’t know who is right.
Instead, Herbalife’s stock has wildly fluctuated based on speculation and whether short-term profits could be made. Traders have wagered tens of millions, with little care of whether Herbalife or Mr. Ackman will prevail.
First came the other hedge funds. Daniel S. Loeb’s Third Point quickly bought and sold less than six months later. George Soros’s fund and Perry Capital also took long positions, in contrast to Mr. Ackman.
Carl C. Icahn also arrived, acquiring 16.5 percent of Herbalife, and acknowledging that it was, in part, driven to get back at Mr. Ackman.
Mr. Icahn and Mr. Ackman have been feuding for years, and it’s unclear whether Mr. Icahn invested to make Mr. Ackman’s life miserable or because he believes in Herbalife. Although Mr. Icahn stated in his public filings that he had done “significant analysis†on Herbalife, his results have not been made public. Such is the fate of billions on Wall Street, but Mr. Icahn has profited so far from his investment.
Since Mr. Icahn stepped in, Herbalife has gone as high as $83.51 a share, from a low of about $25 a share before Mr. Ackman made his bet. The recovery is partly because of Herbalife’s ferocious defense. And when the stock rises, it puts pressure on Mr. Ackman.
Herbalife has changed the way it reports some sales, but otherwise has not given much ground to Pershing Square. The arrival of Mr. Icahn also threw blood in the water, and the hedge funds bought, hoping for a short squeeze. This hasn’t happened, but it has forced Pershing Square to modify its position to limit its losses. It has also probably helped to drive Herbalife’s price up.
It wasn’t just the hedge funds that jumped in. William P. Stiritz, a respected industrialist and chairman and chief executive of Post Holdings, the cereal company, announced that he had personally acquired a $200 million position in Herbalife.
Mr. Stiritz, 79, also seemed to be riding the herd in making his Herbalife bet. Mr. Stiritz stated in a public filing at the time of his initial investment that he “has analyzed the company and concluded that it has a sound business model, a strong distribution system and a positive outlook for long-term growth opportunities.†Mr. Stiritz also intended to offer Herbalife management assistance against “the speculative short position,†implying that he is ready to battle Mr. Ackman.
It’s nice that Mr. Stiritz has done his homework and is offering help, but neither his nor Mr. Icahn’s investment has shined light on Herbalife’s business model.
Without outsiders providing clarity on the company’s prospects, the speculation in Herbalife stock creates extreme volatility as investors trade on rumor and innuendo.
Take the events of the past few weeks. Senator Edward J. Markey of Massachusetts sent out two letters requesting that the Securities and Exchange Commission and the Federal Trade Commission investigate Herbalife’s sale practices. News of this sent Herbalife stock tumbling 14 percent, cutting more than $1 billion in its market value.
A week later, Post Holdings announced that it had hired Timothy Ramey, an analyst at D.A. Davidson, to be director of strategic ventures. Mr. Ramey is one of the most prominent Herbalife bulls on Wall Street.
The hire was a strange one. It was not a direct hire by Mr. Stiritz, who is making the Herbalife investment personally, but rather by the company he leads. Herbalife shares promptly jumped 6 percent, gaining about $360 million in value, on speculation that Post was going to acquire Herbalife. Never mind the fact that Post is a cereal company that has a $1.75 billion stock value, dwarfed by Herbalife’s $6.5 billion market capitalization. A takeover by Post is quite impossible.
And this week, the parade of announcements continued, with Herbalife announcing a stock buyback and debt offering and Pershing Square releasing white papers on possible wrongdoing by associates of Herbalife.
The huge swings in Herbalife’s stock price over such news expose a sad truth about Wall Street. Truth doesn’t sometimes matter very much. Instead, as Herb Greenberg at TheStreet.com has written, where the trade will go in the short term is more important.
But there is a more disturbing issue here. That Wall Street goes on gut is not a new idea. Rather, for all the people on Wall Street searching for information, paying for it and sometimes stealing it through insider trading, Wall Street has yet to find out what is going on with Herbalife.
What we have here is the opposite of a search for truth. No one has shown a great interest in examining the company to find out what is exactly going on.
This apathy extends even to regulators. Various government agencies that have been called into the fight have not announced an investigation, even if it would do nothing more than clear the company.
Some hesitancy may be because of Pershing Square’s initial approach. Mr. Ackman’s presentation seemed all about him and set up his clash with Herbalife as being about a rich titan looking to make more profit. Things were exacerbated by a fight between Mr. Ackman and Mr. Icahn on live television. In this environment, there’s another element to consider: Even the announcement of an investigation would send Herbalife stock down sharply, even if the company were eventually cleared.
Pershing Square should have instead focused on the fundamentals of Herbalife. Does the F.T.C. or S.E.C. really want to be seen as taking the side of a rich hedge fund manager over that of a public company?
Perhaps Pershing Square has realized this, because a change in strategy is going on behind the scenes. Herbalife promotes itself heavily to Hispanics, and Pershing Square has been reaching out to Hispanic groups in search of support for its position. The hedge fund is now hoping is that this outreach will work better than a splashy presentation to persuade regulators to act.
It may be the case, but such an act is going to take time, if it ever happens, leaving Herbalife dangling. For the big players on Wall Street, that may just be fine.
