Last summer and fall proved to be a battleground for a few Wall Street analysts and their direct selling company targets, but Bill Ackman’s Christmastime attack on Herbalife seems to be an all-out war. Ackman is the founder and CEO of hedge fund Pershing Square Capital Management, and he has built a reputation as an “activist investor” who generally takes long positions in companies and pushes for change from a board seat.
But on Thursday, Dec. 20, 2012, Ackman announced a plan to drive Herbalife’s stock price to zero on the basis that the company is defrauding distributors and should be prosecuted under FTC regulations. Commentators and analysts are raising questions about Ackman and his real motives, while also disputing the validity of his claims. Douglas Lane, former Managing Director of Equity Research for Jefferies & Company, followed Herbalife for many years as an analyst and has an in depth understanding of their business model and financial situation. Lane told DSN that Herbalife maintains a very conservative balance sheet and generates a huge free cash flow, operating a solid business that in no way measures up to Ackman’s accusations.
Additionally, Robert Chapman, founder of Chapman Capital LLC, an investment firm specializing in takeovers and turnarounds, has written a guest post at thompsonburton.com pointing out the many flaws in Ackman’s blitz against the 32-year-old company.
Chapman’s examination of Ackman’s analysis makes for compelling reading as he focuses on such points as Ackman’s accusations being old news to both Herbalife and the FTC, which ruled on these issues back in 2004. Ackman’s expertise with more than 300 PowerPoint slides isn’t going to induce the FTC to revisit something they’ve already put to rest.
Oh, that and the timing. Holding his “theater” (as one writer put it) at year end, immediately prior to December’s option expiration date and during Herbalife’s own blackout period so no response could be mounted seems entirely self-serving. Was the entire 3-hour-plus presentation and subsequent media appearances Ackman’s year-end strategy for propping up his own company, which according to news reports was down for the year as of September?
Interestingly, both Lane and Chapman have disclosed that in their private portfolios, Herbalife stock makes up their largest holdings, at 30 percent and 35 percent respectively.
Michael Johnson, CEO of Herbalife, and his team are preparing a point by point rebuttal to Ackman’s claims to be delivered on Jan. 10. We can’t wait.