Ford Motor Co. had its Edsel, Samsung had its Galaxy Note 7, and Pershing Square hedge fund manager William Ackman has his $1 billion short bet against Herbalife Nutrition. Mr. Ackman should take a lesson from the Prodigal Son and ask forgiveness. A hedge fund manger who does not grow wiser by the day is a fool.
Herbalife is a multi-level marketing company that sells supplement drinks and other food products. Five years ago, with visions of gold bars dancing in his head, Mr. Ackman conceived a knavish strategy to earn prodigious profits by shorting Herbalife shares; and, enlisting government regulators to bankrupt the nutrition company. In 2014, Mr. Ackman told Bloomberg TV that he had expended $50 million to research and to disseminate negative news on Herbalife.
Towards that end, as reported in The New York Times (June 2, 2015), he employed a handful of law firms and a public affairs company, purchased opposition research, hired lobbyists, and sought the intercession of legislators. The Federal Trade Commission was convinced in 2014 to open a civil investigation of Herbalife to determine whether it was an unlawful pyramid scheme. On July 15, 2016, the FTC issued a consent order that required Herbalife to pay $200 million for consumer redress; alter its scheme for compensating distributors; sell at least 80 percent of its products annually to consumers; and, appoint an Independent Compliance Auditor.
Last June 4, Herbalife announced 90 percent of its United States sales were documented purchases comprised of more than three million receipted retail transactions. Approximately 400, Herbalife customers had converted or enrolled as preferred members in the United States since the program commenced in October 2016. During the past ten months, Herbalife has created cutting-edge technology and tools in collaboration with its distributors to efficiently document retail sales. The technology and tools enable Herbalife to collect new marketing data, such as pricing, buying preferences and consumer purchasing trends, to gain a competitive advantage.
Mr. Ackman may have finally seen the light. According to Fortune (Nov. 1, 2017), he stated that his $10 billion hedge fund, Pershing Square Capitol Management Fund, had restructured its Herbalife position after its share price climbed approximately 50 percent in 2017. He elaborated: “We covered the shorts and replaced them with outright put positions.” Mr. Ackman further declared to Reuters that Pershing Square’s potential losses on Herbalife will now be capped at 3 percent of the firm’s capital: “We can still lose money but the loss is still capped.”
Mr. Ackman’s Captain Ahab-like effort to destroy Herbalife by manipulating government enforcement agencies has persisted for five years. It would be wise for Mr. Ackman to call a truce before he is destroyed by a figurative White Whale. Mr. Ackman arguably shorted Herbalife based on non-public information.
A competitive marketplace that rewards skill, foresight and industry should determine Herbalife’s destiny. Crony capitalists or government bureaucrats should have no influence. What Adam Smith taught in The Wealth of Nations in the year of the America’s independence has been verified by the ensuing 241 years:
“The statesman who should attempt to direct private people in what manner they ought to employ their capitals, would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it.”
And what has Mr. Ackman’s crusade against Herbalife accomplished for the wealth of the United States? Even less than would have Alaska’s notorious Bridge to Nowhere.