Shares of Herbalife (HLF) up over 5% today, ostensibly on word that Carl Icahn is going to nominate 3 new directors to the 13 person board, that gives Icahn 5 members of the board and pretty much puts Carl in control of the entire Herbalife operation.
Herbalife is down more than 36% year to date but they’ve more than doubled since the lows that they hit when short-seller Bill Ackman torpedoed the company in December of 2012 calling Herbalife a pyramid scheme and suggesting that he would never cover his shares until it hit zero. Mr. Ackman’s position picked up a little steam for him when he got the FTC to start investigating Herbalife’s business practices to see if in fact it was a pyramid scheme.
Ackman’s attack was really based on the MLM (multilevel marketing) business model itself. Before Ackman became a champion of the Latino community when he said Herbalife unfairly targets Latinos in its sales campaign, he first just said that it’s a pyramid scheme in general. Multilevel marketing is an ugly business, the failure rate is somewhere near 99% over five-years.
Other multilevel marketers are Avon (AVP), Mary Kay, and Nu Skin (NUS). Take a look at Nu Skin today; it’s up about 20% on word that the Chinese government which had been investigating the company gave them pretty much a slap on the wrist and a $500,000 fine for their business practices in China. Another part of Ackman’s Herbalife thesis was that the Chinese were going to crack down on this pyramid scheme as well.
A couple of things to note 1) if you’re investing in Herbalife you might as well just go to Jersey or Las Vegas—call your bookie, put all your money on red and/or Stanford to win the NCAA because you’re pretty much betting blind. We’ve got the two sides entrenched right now. On one side you’ve got Bill Ackman who has decided again that he’s a champion of the Latino community because again his pyramid scheme thing wasn’t getting traction, on the other hand you have Carl Icahn who controls the Herbalife board and who is defending the unseemly albeit not illegal business practices of pyramid scheme, multilevel marketing, whatever you chose to call them operations.
Your takeaway as I said before, these companies are not to be wagered on, this is a very big money game involving very powerful people who don’t like each other at all, it’s best at this point to sit back and watch. Don’t believe all the headlines, this is all about China—it’s about Nu Skin for Herbalife today. If you’re long maybe take some off, if you’re short I don’t understand why. If you’re bill Ackman, I’m sorry man but resorting to bribing officials to get your investigation—dude that’s kind of a foul.
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