Herbalife turns up pressure on Ackman

Herbalife, which is the world’s largest multilevel marketing (MLM) company devoted solely to nutritional products, recently released the fourth in a series of videos attacking Ackman’s assertions.  Herbalife has set up a website called TheRealBillAckman.com​ where the videos are hosted.  The latest video, titled “Ackman’s Tactics Called Into Question”​ asserts that his tactics “might cross ethical and possibly legal lines” ​and “do no meet the established norms of Wall Street and the standards of activist investors.”​

Double edged activist sword​

Activist investors have a long history of involvement with public companies.  Carl Icahn (himself a major Herbalife shareholder) conducted one of the early, controversial forays by gaining control of struggling TWA in the mid ‘80s and then selling off the assets of the company to pay for the leverage used in the purchase, a practice that came to be known as “asset stripping.” The activist investor moniker came to be associated with a particular short-term approach to investing, where investors took large positions in a company's stock and then urged the board to maximize share price at the cost of all else. In other cases, however, activist investors have spurred positive changes at companies that were poorly managed, and the strategy has also been used to pressure companies to divest from certain activities that raised social justice concerns.

“Activist investors can, and often do, increase shareholder value by improving corporations in many ways. Yet, in the wrong hands, activist investing can do untold damage to employees, companies and our country’s economy and if left unchecked and without accountability, they portend a troubling future for our financial markets,”​ said Alan Hoffman, Herbalife’s executive vice president, global corporate affairs.

Propping up the short position​

The difference with Ackman’s campaign is that is has been primarily aimed at supporting a huge short position in the company’s stock that he took through his hedge fund Pershing Square Capital, a position which has been valued at up to $1 billion. These sorts of short-position PR blitzes have been seen before, but the scope (and cost) of Ackman’s campaign was ground-breaking. Ackman alleged among other things that the company’s business model amounted to an illegal pyramid scheme and that Herbalife took advantage of less sophisticated distributors in minority communities, inducing them to incur significant personal debt to set up distribution locations known as nutrition clubs.

Herbalife seemingly put these concerns to rest in July with the settlement of a case launched by the Federal Trade Commission.  To allay FTC concerns, Herbalife agreed pay a $200 million fine and to make certain changes​ in how it categorizes distributors, how it compensates them and in how it communicates with them. Herbalife, in the several years following Ackman’s first attack, had started to be more forthright about how much the average active distributor can expect to earn, but FTC had noted that the company’s recruitment brochures still sold the get-rich message, with pictures of mansions, expensive cars and luxury travel locations. 

Risk even to smaller companies​

The risk of this sort of activity to public companies in the dietary supplement industry extends to levels below that of Herbalife, which recorded more than $4 billion in annual sales in 2015.  Ingredient supplier and consulting firm ChromaDex fended off its own short-position attack in June when an article by a group calling itself Bleeker Street Research was posted on the investing site seekingalpha.com​ that alleged ChromaDex had fraudulently engineered the revenue that accounted for its recent rise into profitability via a sweetheart deal with a company that is owned by one of its board members.

“While I wouldn’t put my company in the same league with Herbalife, this is no different than what Ackman did to Herbalife. These guys took a big short position on our stock before putting out a negative article on the company. The last line of the article, ‘we are short on ChormaDex stock’ should tell you everything you need to know,” ​ChromaDex CEO Frank Jaksch told NutraIngredients-USA at the time of the article’s posting.  ChromaDex subsequently induced Bleeker Street Research to retract the article in full and issue an apology, which Jaksch said is a highly unusual outcome in this sort of case, and underscores his assertion that the article’s claims were baseless.