Hedge fund manager Bill Ackerman says Herbalife is a pyramid scheme and has bet $1 billion on its fall. Hedge fund manager Dan Loeb begs to differ and has bet $350 million that the stock will rise in value.
Herbalife is under a lot of pressure at the moment. The L.A.-headquartered nutritional supplements maker has been accused of being a pyramid scheme by hedge fund manager Bill Ackman.
He's betting more than $1 billion that the company won't be around for much longer. Other hedge fund guys, like Dan Loeb, are taking the other side of that bet, countering Ackman's short position by buying up Herbalife stock and betting on its continued success.
Herbalife is doing a webcast for investors and analysts in New York this morning. This is the first time the company will be explicitly responding to Ackman's pyramid scheme charge, which he laid out late last year. I'm liveblogging the webcast so check back for updates. (All times are West Coast, by the way, as I'm in Los Angeles).
CEO Michael Johnson is up. He's proud. Talking products and public health. Confident about the future. Call's news of recent weeks "misinformation." He says it's created "confusion and doubt" and is here is present the facts and mentions Pershing Square, Ackman's hedge fund, for the first time. And he says half a dozen Herbalife executives are going to speak today. So this could go for a while. One photo is worth "at least 100 PowerPoint slides" he says — a joke about Ackman's 343 slide takedown of the company.
COO Richard Goudis is up to take on the charge that Herbalife isn't a product company. Says that if Pershing Square had "just taken the time to call them" all the confusion of why Herbalife isn't a pyramid scheme could be cleared up. They're starting with the charge, made by Ackman, that they don't really spend much on R&D. Every year Herbalife invests $44 million per year on R&D. "Pershing misrepresented our our R&D spending" to vindicate Ackman's thesis, the company claims.
First occurrence of the world "mouthfeel" is a heavy discussion of the relationship between Herbalife and SOY. Watch out, Ackman! These people know soy! No R&D indeed!
Real companies make real investments, Goudis says. "Pershing would have you believe that we ship all our products through three distributions locations," he says. Nope. They have 300. PLUS they have over 300 non-Herbalife distribution points. Not three. Over 300.
Goudis rolls out slides that show some distribution locations in Asia. They are FANCY. Then he tackles the cost of the products, relative to others. Ackman claims that the prices are much higher than the competition. And now Goudis takes on the charge that people buy and sell Herbalife on eBay to undermine
Dr. Bill Frankos is up. SCIENTIST! And in fact he says he's here to talk about "the science of Herbalife." He a former FDA guy. Why did he leave? "My new position at Herbalife has allowed me to continue my commitment to consumer safety and health."
Herbalife investor call drinking game: Drink a shot of a supplement every time Frankos uses the word "science."
Very dense science and product production stuff. Not much about Ackman's claims. The overall point is that Herbalife is FAR more than a food company — it's more like a drug company.
Goudis is back. Ackman's claim that we're not a product company — Herbalife has the only Nobel scientist in the industry working for it — is false, he says.
Des Walsh is up. He's the President. Looks like he's going to attack Ackman's pyramid scheme allegations directly. For example, he says that Herbalife is a business-to-business company. And by that he means that they have relationships with front-line distributors — not so much with the people that those distributors employ.
A hired gun consultant is up to address the charge that "Herbalife doesn't have customers" — that it's just about signing up new distributors, not about selling its products. In Los Angeles, she says, the Herbalife logo is "fairly ubiquitous" — a response to the charge that Herbalife doesn't do any marketing.
Des Walsh is back to fire away at Ackman's presentation. He's going hard at the idea that Herbalife doesn't really have customers, lacks brand awareness. He also tackles the charge that Herbalife is pitching a get-rich-quick scheme. And a big point: He claims that almost 90 percent of former Herbalife distributors would recommend becoming a distributor. They aren't victims, as Ackman claims. It "just didn't work out for them."
Walsh rolls out the case that Herbalife does sell outside the network of distributors. Then he segues into the charge that Herbalife products wound up getting stuffed into garages, unsold, and can't be returned. He says distributors can return products and that there is a fair buy-back policy.
Walsh talks about Herbalife's Nutrition Clubs. They're sort of like Herbalife's version of a Starbucks. He strangely evokes an image of people going to them for "hugs" while consuming the company's products. And he goes to a video. It shows Nutrition Clubs in low-income neighborhoods, suggesting that Herbalife is running its business while improving health in communities where nutrition might not be job one.
Plus, the Nutrition Clubs show that Herbalife isn't just about distributors signing up new suckers, it's about people outside the network using the products.
Walsh says that 73 percent of Herbalife sales are for follow-on retail sales or personal consumption. Not to collect points in Herbalife's system and advance up the pyramid (if the company is a pyramid scheme). He also says that Herbalife doesn't require a set number of product purchases (which would deliver cash to Herbalife up front while distributors have to shoulder a high initial cost of entering the system and are then under pressure to sign up new participants).
"What you earn isn't based in your placement, but your activity," he says. Sellers of product make more than their sponsors.
He goes after the charge that if you join Herbalife today, you're so far down the pyramid that you'll never prosper. This goes at Ackman's claim that Herbalife will collapse because it's running out if new markets and demographic groups to exploit.
Herbalife isn't a "pop and drop" business — entering new markets, scamming everyone, then moving on. Brand is strong and growing in mature markets. And Des tries to reverse the idea that Herbalife is exploiting low-income markets — in fact it's bringing better nutrition to these markets.
He has a "problem" with Ackman presenting information that factually deficient. Adds that Herbalife is legitimate company with customers who "need our products."
John DeSimone, the CFO, is up. He starts out with a story about how a guy from...Poland? Yes, Poland, started asking him questions at a bank conference. The guy from Poland, he says, was from Pershing Square, Ackman's hedge fund. "If Bill wants to know about our business, he can call me," DeSimone says he told the man.
DeSimone is getting into financial details. Taking on the Ackman charge that every dollar paid to a distributor is a "recruiting award."
Makes a joke about pricing of products and gets the biggest laugh of the whole presentation.
He argues that even at the steep discount on products seen on eBay, distributors still make money. So there is demand for the products. They aren't just a smokescreen to sign up new recruits in the pyramid scheme.
This is perhaps the point at which one might want to ask if Herbalife doth protest too much. But they still have and hour and half to go before the match Ackman's three-hour presentation on why Herbalife is a pyramid scheme.
Seemingly minor detail, but DeSimone points out that Herbalife has almost $1 billion available for share buybacks. So there's money in the bank to support the stock against Ackman's short position.
CEO Johnson is back to present a video.
Now we're getting a 101-type lesson on what a multi-level marketing company is all about. Point is made that there's no compensation for "mere recruitment" of new participants. The company is marketing products, not a recruiting scheme.
Whew. I might need an energy shake to get through the rest of this.
Discussion now of the low-cost nature of the Herbalife "enterprenurial" business model. You don't need as much cash to join hte system. Franchising a fast food restaurant, for example, has much higher upfront costs.
Anne Coughlan, PhD, who is presenting now, is DEFINITELY providing the strongest counterarguments to Ackman's pyramid scheme allegation. That said, the Northwestern professor has studied Herbalife with...Herbalife's support.
She "didn't see a scintilla of of evidence" that Herbalife is running a pyramid scheme. Herbalife isn't making money on the initiation fees. It has a buyback program for unsold products. And people who aren't distributors consume the product.
Johnson is back to close it out. Makes a joke about how long Ackman's presentation was (we're headed into hour three here). Talks about his 17 years at Disney. "We've built a brand that's sensational."
Questions now. Just none about the SEC investigation that the Wall Street Journal reported on Wednesday. Johnson says that Ackman has a point about Herbalife calling everyone a "distributor." That's a "vocabulary" issues and Herbalife is looking and making changes.
Johnson says the direct selling industry needs to do a better job of presenting itself. "Can we combat all the negativity? I don't know."
That's a good place to stop liveblogging. Check back later for more updates on this story. We'll see now whether Ackman returns fire!
UPDATE: I don't know know why I goit it into my head that Bill Ackman was Bill Ackerman, but I corrected the error on this and a previous post.