Big Mistakes by Michael Batnick

Author:Michael Batnick
Language: eng
Format: epub
ISBN: 9781119366416
Publisher: Wiley
Published: 2018-06-06T00:00:00+00:00

After seven years, Ackman would ultimately be vindicated, and he walked away with $1.4 billion in profits.11 But his battle with MBIA was a warm‐up for the war he would have with Herbalife.

By definition, activist investors are public, because once you acquire 5% of a company, you must file a 13D registration with the Security and Exchange Commission. Short positions, however, do not have to be disclosed, but Ackman chooses to do so anyway, like nobody has ever done before.

Herbalife is a Los Angeles–based company that sells weight loss products and nutritional supplements. Herbalife has been in business for 37 years, and now operates in 90 countries. In its first year, 1980, Herbalife did $23,000 in sales. That grew to $500 million by 1984 and to $1 billion by 1996. In the year before Ackman shorted the company, they did $5.4 billion in sales and had the highest paid CEO in America.

On December 20, 2012, 500 people gathered to watch him deliver his short presentation, “Who Wants to Be a Millionaire?” Ackman accused Herbalife of being a pyramid scheme, and said he would donate any profits made, “blood money” as he called it, to charity.12

Ackman's presentation noted that Herbalife was worth more than Energizer Holdings, The Clorox Company, and Church and Dwight. These consumer companies own Arm & Hammer Baking Soda, Trojan condoms, Energizer batteries, Edge shaving gel, Clorox Wipes, and others that you find in homes all across the United States. Ackman asked the poignant question, “Has anyone ever purchased an Herbalife product?”

A key distinction between these companies was their gross margins, meaning their profits once you remove the cost of goods sold. The three traditional companies made between 42% and 46% on their products. Herbalife was running north of 80%.

Ackman showed another slide showing Herbalife's top‐selling product, Formula 1, and describes it as “a $2 billion brand nobody's ever heard of.”13 He shows a picture of this Formula 1, an Herbalife shake, and compares it with others: Oreos, Charmin, Crest, Gerber, Palmolive, Betty Crocker, Listerine, and Clorox. Formula 1 is a shake, but unlike competitive products made by GNC, Unilever, and Abbot Labs, it's a powder. Formula 1 doesn't even offer a ready‐to‐drink shake.

Herbalife sells 10 to 20 times as much powder as the competition, but it does so without a store. This is at the heart of Ackman's argument. Herbalife, he contends, is a pyramid scheme. Herbalife isn't selling its products to consumers, it's selling its products to distributors, who sell it, or don't, to consumers. “When you do the math, you find out your average club, these are the ten we went to in Queens, loses $12,000 a year.” He then shares a video from one of the distributors, “Where your money's made is not serving smoothies. Where your money's made is having hundreds, or tens, or thousands of distributors around the globe who are working.”

Ackman then asks, “How is it possible that Herbalife sells six times more nutrition powder than Abbot Labs, Unilever, and GNC

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