Battle of the Titans: Hedge Fund Guru Bill Ackman v. Health Shake Giant Herbalife
Crony capitalism is defined as an economy in which success in business depends on close relationships between business people and government officials. It may be exhibited by favoritism in the distribution of legal permits, government grants, special tax breaks, or other forms of state interventionism.
On December 19, 2012 Bill Ackman, a billionaire with a hedge fund named Pershing Square declared war on Herbalife. In case you don’t know who Herbalife is, they are a health shake giant posting around $5 billion in sales last year. You may ask right off the top…what does a Wall Street Gordon Gecko type like Bill Ackman have against health shakes? Apparently he has nothing against the shakes or the weight loss products or the vitamins or the skin care creams or the sports drinks. Ackman just personally hates the Herbalife way of doing business. He considers it a pyramid scheme.
Herbalife is a 35-year-old company with 8000 employees selling 90+ products in America and internationally. Herbalife is an MLM, that is to say it has a multi level marketing based sales model. All MLM’s that are legal are built upon the Amway model that received a federal stamp of approval back in 1979. There are already a ton of government rules put on MLM’s to make sure they are legal.
Love ‘em or hate ‘em, MLM’s make up a huge piece of the American economy. Controversy has always swirled around this unique way of doing business. No one until Bill has taken it upon himself to openly try to bring down an extremely successful and legal company before. Why would Bill do this? It’s costing him millions to get it done. It kind of makes you wonder if Bill’s parents still have a garage full of Amway’s laundry detergent, SA8 or some other product of the company. He really has it in for MLM’s in general, but more specifically Herbalife.
Ackman hates the company so much he publicly declared his hedge fund was taking a $1 billion short position in Herbalife in hopes of profiting immensely by their eminent demise. Their stock HLF, fell 10% in six seconds. Trading was halted as circuit breakers were tripped to avoid a panic. Ackman promised to give his personal profits from bankrupting Herbalife to charity. How altruistic.
Full disclosure. I was in Amway, another MLM company, for several years. My wife and I spent way more than we ever made. I am quite bitter about it, but it wasn’t Amway’s fault. It was my own fault. I never went Diamond or bought a Beemer. In fact, it was a personal financial disaster. So, for me to be writing a piece in defense of Herbalife and its right to be a viable American company is a little surreal. I couldn’t help it though, as I came across a fantastic article in Fortune Magazine detailing this epic struggle between a network marketing giant and an angry Wall Street guy, I knew I had to comment on it.
Bill Ackman didn’t count on Herbalife’s CEO, Michael Johnson formerly of Disney, fighting back. When two monsters of industry collide sparks fly and they’ve been flying for more than three years. Ackman has essentially been thwarted by Herbalife at every turn. Ackman orchestrates a new attack and Herbalife stock drops like a rock. Johnson adapts the business and streamlines it and they experience huge growth. It’s like two heavyweights standing toe to toe.
“This isn’t about Herbalife’s business model,” Michael Johnson said in fortune piece. “This is about Bill Ackman’s business model … This is totally wrong what’s taking place … This is blatant market manipulation.” They are tired and angry and neither one wants to give up. Someone is going to lose, you know they will. Ackman seems to be desperate. He’s on the ropes. He’s about ready to bite someone’s ear off. Enter the government. Ackman has enlisted the help of a few key Congressman and Senators in his attempt to force Herbalife into submission.
Reread the crony capitalism definition. If it had a picture it would be Bill Ackman hugging a Senator. The caption should read “Hail Hydra,” because when Ackman failed to tank the company as planned he had to go the old fashioned way. He went to the government to shut them down. A few million spent the right way in D.C. gets a long of things done and it greases a lot of wheels.
I hate this stuff. This is what makes everyone so jaded about government. This is what makes people so easy to rile up about Wall Street types. I have serious doubts that Ackman even has anything against Herbalife other than they refused to lay down and die like the meek MLM they were supposed to be. That death would have profited Ackman billions. I have doubts that it would all go to charity. The whole idea that a hedge fund manager can manipulate the markets as much as he can is sick to begin with. Then it gets even worse as you contemplate that with the right help…the right kind of friends in Washington, Ackman could yet succeed in his attempt to crush a company for either activism or profit. Either way it’s wrong. Herbalife produces something like 50 products and employs thousands of real people.
Congress can do something to study this controversy. Rep. Sean Duffy (R-Wisconsin) is the Chairman of the House Financial Services Subcommittee on Oversight & Investigations. It might be a good idea for this committee to hold fact finding hearings to study if this hedge fund billionaire has crossed the line between free market activism and the purchasing of the levers of power in our nation’s capitol to make good on his shorting of a company’s stock.