Herbalife Ltd. (NYSE:HLF) shares have risen consistently despite billionaire hedge fund manager Bill Ackman calling it a pyramid scheme and placing a $1 billion short bet. The nutritional supplement maker’s CEO Michael Johnson continues to fight back. The battle of Herbalife Ltd. (NYSE:HLF) is a recent cover story in Bloomberg Businessweek written by Duane Stanford.
In December 2012, Pershing Square Capital Management chief Bill Ackman delivered a presentation. He massacred the company in almost four hours with 340 slides. At one point, he even said that over 90 percent of the profits Herbalife Ltd. (NYSE:HLF) distributors earn comes from recruiting. Herbalife executives said that was an outright lie.
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Ackman shorted over 20 million shares of the nutritional supplement maker, mostly between $50-$70 per share. The stock plummeted about 40 percent in just four days. But Herbalife CEO stood rock solid, denying all allegations. Then legendary investor Carl Icahn entered and started buying shares, starting an open battle against Bill Ackman. On Valentine’s Day, Icahn declared that he had built a 13 percent stake in the company. He called the nutritional supplement maker a 100 percent legitimate business
Herbalife Ltd. (NYSE:HLF) shares started rising slowly. But prices fell again when an outside auditor quit as its partner had spread rumors that the company would go private. But Herbalife Ltd. (NYSE:HLF) has hired a new auditor. The company has 3.2 million independent distributors. Its biggest manufacturing plant is in Lake Forest, California, with two other plants in China. The company is building another plant in North Carolina with a $130 million investment.
When Herbalife’s controversial founder Mark Hughes died in 2000, the company went through a tumultuous situation. Three chief executives came and went in the next three years before Michael Johnson was appointed as CEO in 2003. He restructured the company, encouraged distributors to focus more on selling products and less on quick riches. During his tenure, Herbalife’s sales have risen from $1.2 billion in 2003 to $4.1 billion in 2012.
Herbalife Conducted Studies
As the attack from the hedge fund manager Ackman continued to grow, Herbalife Ltd. (NYSE:HLF) asked an independent firm, Lieberman Research Worldwide, to conduct a study involving unpaid volunteers. Of the respondents who had used Herbalife products, 91.6 percent said that they were not registered distributors.
When the supplement maker presented the study during an investor meeting in January, Ackman said the research was flawed and biased, and asked the company to get exact data on the sales of distributors. Since then, Herbalife has made all data available to Bloomberg Businessweek. Bloomberg appointed two respected independent research firms to evaluate the data. The researchers said they don’t see any red flags.
Going a step further, the company cross-referenced its registered distributors with a database of addresses it had collected while shipping products directly to customers. The cross-check revealed that over 1.1 million orders were from non-distributors, which represents 25 percent of the total orders.
Meanwhile, Carl Icahn has increased his stake in the company to 16 percent. As of May 17, he has generated a 20 percent return on the stock. Ackman has made some money too, because the stock is still trading below where it was when Ackman started attacking it in December. But CEO Michael Johnson remains unfazed and confident. Rubbishing all the allegations of the company being a pyramid scheme, he says, “We’re still going to be here 33 years from today.”
Herbalife Ltd. (NYSE:HLF) Shares were up down 1.02 percent to $47.76 at 1:50 PM EDT.