Ackman’s Wager: Public Service or Public Penance?
Nick is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Lose credibility now. Ask Ackman how.
Often entertaining and right enough times that people will actually pay attention to his 300 slide PowerPoint presentation, celebrity investor Bill Ackman has not only wagered that Herbalife’s (NYSE: HLF) stock will drop to zero, but has promised all the proceeds of his short will be donated to charity. Ackman has stated that he’s doing a public service in challenging Herbalife, which he characterizes as a “pyramid scheme”. Of course, Ackman knows what a pyramid scheme is. After his spirited defense of Madoff bag man J. Ezra Merkin (a name seemly ripped from the script of Boiler Room), Ackman’s exhortations trailed off after Merkin settled with prosecutors and faded away.
Ackman’s wager seems less a publicity stunt, and more an indication that he now lives in a bubble and there is no longer (if ever there was) anyone around him to keep his ego and vivid fantasy life in check.
Moreover, observers are seldom swayed when an investor promises his yet to materialize profits to charity. Furthermore, it is unclear to many (not least of all Ackman's pyramid builders) how tossing three million people out of job (such as it is), people who have voluntarily joined and worked for a company would be more charitable than his impending tax write off – especially when every single one of Ackman’s accusations has been refuted numerous times (sometimes in court and public hearings) over Herbalife’s existence. Also, legendary investor David Einhorn’s pointed questioning on the company’s conference call earlier in 2012 offered an example of a far more responsible (and effective) approach to activist investing.
Most telling is that repeated requests by Herbalife to challenge Ackman in face-to-face debate and in other equal forums have been rebuffed. It is a rare corporation that spoils for such a confrontation (let alone throws down the gauntlet). Moreover, why would Ackman waste another opportunity to display his 300 slides of genius? The more Ackman prances across business news channels, the more it seems that his Herbalife stunt is some country club richman’s bet to say the word “pyramid” as may times as possible on public airwaves.
While Herbalife is definitely a cult, it does not appear to be one of the Isis persuasion. Worst case, Herbalife takes away money from people who clearly shouldn’t have any in the first place. Best case, Herbalife is a really great placebo that is an elaborate way to sponsor mediocre soccer teams in emerging markets. Ackmanites might instead opt to throw their money directly into Manchester United (NYSE: MANU) shares, which while not a pyramid scheme, is simply just a scheme – and it has the rigged voting to prove it. (Short of its physical assets and the possible return of formal slavery, there is little that a sports franchise actually possesses in the form of tangible, sustainable value – and ultimately they are even less transferable than an MLM distributorship. Fickle fans and rampant counterfeiting of memorabilia and other swag also undermine the branding estimates that usually cushion the numbers.)
Herbalife’s stock is down, but far from out. In the long term, the loser may be the media – not business news (which everyone knows is about as useful as sports news), but a company like Google (NASDAQ: GOOG). If studies that show that Facebook (NASDAQ: FB) “like-campaigns” are still far less effective than direct mail harassment at soliciting action and donations, then Ackman’s GoogleAds campaign is one more kick to new media’s teeth in a year where advertisers are beginning to take a hard look at their advertising returns. Ackman’s campaign has clearly failed to achieve his Year Zero, and while he undoubtedly has hurt Herbalife’s image, he has probably only strengthened the resolve of its zealots, as every religion needs a devil – and a deluge is also helpful. Moreover, as it appears Herbalife will survive Ackman, he may have just undone any reforms Einhorn had set in motion with his earlier prodding.
Herbalife’s predicament also highlights an increasing tendency for the American system to devour its own. The uncertainty and anticipation surrounding the upcoming Herbalife meeting where the company’s CEO is expected to make good with confirmation of key facts (like 90% of product sales are outside its distribution network) which will demolish the pyramid accusations. However, this may still not stop regulators from once again working over Herbalife as Ackman is a reliable font of cash for Democrats and his actions indicate he has pulled out all the stops in his Herbalife quest. The likely probes by regulators still keeps open the possibility of the company being litigated out of existence – whether or not a verdict is ever rendered.
It is worth considering the mounting fines being imposed on the queen of the multi-level marketing (and an S&P 500 component), Avon (NYSE: AVP) for activities that may or may not have taken place in China (in a fashion that is legal in China, but not in the US). Avon's predicament is also disconcerting in the same way that the destruction of Switzerland’s oldest bank Wegelin & Co. is problematic. After being hounded by US authorities for assisting in tax evasion, it was forced to close up even though the activities it in engaged in were legal in Switzerland and took place in Switzerland.
With companies like Avon deriving more revenue from Brazil (and soon China as well) than the US, it and others like Herbalife may start taking actions like far more unassailable companies have done and shutter their US operations, limit their exposure to US citizens and employees, and focus on the cheaper random corruption of international markets rather than the expensive whimsical caprice of enforcement by US authorities.
In the meantime, Ackman’s wager seems more like a clumsy PR attempt at redemption for his unwitting abetting of the Madoff fallout, rather than a serious attempt to profit – and now his ego is on the line.
Now that it appears that HFL stock is on its way to recovery, it remains to be seen if Ackman will now demand that charity reimburse him for his losses.
Nick Slepko (hukgon) has no position in any company mentioned here at the time of publication. The Motley Fool recommends Facebook and Google. The Motley Fool owns shares of Facebook and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!