Bill Ackman lost in his bid to destroy Herbalife, and that’s a good thing.
In 2012, Ackman shorted Herbalife stock to the tune of $1 billion, then set about trying to make good on his bet by destroying the company.
He started with a 342-image slide show to a group of investors in Manhattan that labeled Herbalife, a Los Angeles-based firm that sells diet supplements, weight loss products and power shakes. The slides painted Herbalife as an illegal pyramid scheme, and Ackman’s show sent its stock down 42 percent in one day.
From there, he went to the investment press – print and TV – and tried to discredit Herbalife. When that stalled and the stock recovered, he got a college buddy to make a movie in which aggrieved former Herbalife customers, tracked down by Ackman’s henchmen and paid to get mad all over again, told their stories to the camera. He cynically focused on minority former distributors and even approached civil rights organizations looking for more “victims” to involve in his scheme.
That didn’t work either, so he did what too many billionaires do these days – he went to Washington and tried to buy some bureaucrats. In his case, he went to the Federal Trade Commission and tried to convince it Herbalife was “one of the great frauds of all time” and that its CEO, Michael Johnson, was “running a criminal enterprise.”
Herbalife is a multilevel marketing company, much the same as Avon and Tupperware, in which distributors earn money both by selling products and by recruiting other distributors. Ackman tried to establish that it was rather a pyramid scheme, in which little of the actual product ever is sold and the entire effort is focused on recruiting new investors to keep the people at the top earning.
But Herbalife has been around 35 years. It has 8,000 employees and 5,300 products sold in 91 countries. It made $5 billion in revenues in 2015 and its stock has reached $65.40 per share, its highest in two years. Obviously, investors have not heeded Ackman’s warnings to get out of the stock.
And last week, the regulators failed him as well. The Federal Trade Commission announced it had reached an agreement with Herbalife to settle all the matters raised by Ackman and his hired guns. In the agreement, Herbalife promised to pay $200 million to the federal government and $3 million to the state of Illinois to end all current investigations. But the agency blessed its business model and said it had no further business with Herbalife.
The firm also agreed to change some business practices, and the company says many of the changes agreed to already were moving forward before the agreement. It now will delineate between those who wish to be preferred members and make income from both selling the product and recruiting distributors and those who want only to become distributors and sell the products.
“While the Company believes that many of the allegations made by the FTC are factually incorrect, the Company believes settlement is in its best interest because the financial cost and distraction of protracted litigation would have been significant,” read a press release from Herbalife. “And after more than two years of cooperating with the FTC’s investigation, the Company simply wanted to move forward.”
It also agreed to other changes that the company says were aimed more at improving performance across multilevel marketing and not just aimed at Herbalife.
It’s unlikely but not impossible every one of these changes was absolutely necessary to the future success of the republic. It’s unlikely but not impossible Ackman pursued Herbalife with Ahab-like determination because he thinks Americans needed these reforms. It’s even possible he truly cares about people being victimized by pyramid schemes and tried to stop one in the making. He did after all promise to give any profits from shorting Herbalife stock to charity.
But companies don’t exist for 35 years and employ 8,000 people if they are pyramid schemes. They don’t continue to bring new products to market — products that outsell far better-known offerings from competitors.
More importantly, Bill Ackman is not the moral police. He doesn’t get to decide which companies need to be driven from business because he doesn’t happen to like their business model. He doesn’t get to destroy 8,000 jobs because he just can’t stand to see even one more pyramid scheme that is not a pyramid scheme go forward.
But what really ought to bother you and me is that Ackman prevailed upon a member of Congress — U.S. Sen. Ed Markey, D-Mass., in this case — to prevail upon a federal agency to prevail upon a private company to spend millions of dollars defending itself against unfounded charges and beefing up security for its executives. He tried to break a company, all its executives and employees and the thousands of people who invested in it – all because he says he didn’t like its business model.
Herbalife lives, Bill Ackman’s best efforts notwithstanding. But the problem of billionaires using their money to turn government against their business adversaries has not gone away and will not go away unless we demand it.
So every time you hear someone say we need more regulation, think about Bill Ackman and what he tried to do to Herbalife – and how he tried to do it. He used us to do it, and that’s not right.