Ackman vs. Herbalife

This is porn for traders and scary for MLM fans.

If you haven’t watched Ackman’s presentation on HerbaLife, you should. It’s 3 1/2 hours long, but worth the time. Pershing Square is on a crusade to put HerbaLife out of business, yet his crusade doesn’t seem purely financial. Ackman projects a convincing argument of injustice.

You can find the full presentation on factsaboutherbalife.com.

For the same reason I like reading MuddyWaters research, this presentation is titillating. His thesis, which is almost obvious, is that HerbaLife is a pyramid scheme, deceptive and illegal, less obvious is that they’re going to implode quickly.

Ackman channels Jon Stewart. Bam!

The story is interesting to me because Ackman says he’s staying short, he could have bailed after this presentation. He also seems ‘semi-human’ which I appreciate. He’s not Jamie Dimon.

The 2nd premise is that HerbaLife retail sales are essentially non-existent and it’s distributors are in reality its retail buyers. Again this is fairly apparent, the products are 3x as costly and anyone that’s heard an MLM presentation knows the real money is in recruiting.

Ackman isn’t just putting pressure on HerbaLife, but also on the FTC and SEC. If so many people are chosing to be distributors (retail customers), and this is illegal will the FTC and SEC step in and say ‘stop’? Should they? Herbalife has 3+ million distributors. This business rests on deception, ok, but that’s true for cosmetics and pharmaceuticals. Cosmetic companies sell the dream by spending billions on advertising, HerbaLife sells it’s dream to ‘down stream’ distributors’ through the pyramid. They target a lower-income demographic, but who isn’t targeting a demographic?

The problem for HerbaLife is disclosure and deception. As a brand I’d say they’re in deep trouble, as a stock they’ve retraced 50%.

What’s the trade, with Ackman VERY short?

Here’s a thoughtful response and an interesting interpretation of Ackman’s thesis from John Hempton. Have a look.

UPDATE: This story keeps on giving! FT digs in with a Buy Case.