RS 2: A Billion
Dollar Bet
Herbalife is a company that sells weight loss shakes, teas, and vitamins. Unlike other weight loss companies like Slim
Fast and Hydroxycut, Herbalife does not spend money on advertising or sell
their products in stores. However Herbalife is still a company that has been around for thirty years and is worth 4
billion dollars. In fact, their most
competitive brand, Formula 1, is worth 2 billion dollars and competes with Slim
Fast.
One
day Herbalife held a conference to discuss the quarterly reports. David Einhorn, a hedge fund manager, accused
Herbalife of short selling. Short
selling is the “Sale of securities or commodity futures not owned by the seller
(who hopes to buy them back later at a lower price)” (princeton.edu). Once Herbalife was accused of this, their
stocks dropped twenty percent. Another
hedge fund, Bill Ackman, heard this conference and made a one billion dollar
bet against Herbalife, and the stock dropped even more. Ackman and his colleagues then spent three
hours attacking Herbalife. Bill Ackman
tried to prove that Herbalife was a pyramid scheme and was a company of
fraud. In defense of his company, Herbalife’s CEO, Michael Johnson took to TV to prove that his company was not a pyramid
scheme.
To prove that Herbalife is a pyramid
scheme, Bill Ackman began by explaining the questionable details about how the
company works. He uses the example of the selling process. It is very similar to Avon in the sense that
the seller is in charge of selling the products and recruiting others to get
involved in selling Herbalife products. One seller places his ads for the
product on Craigslist, in order to collect his compensation. Even another Herbalife seller recruited him,
and she also makes money when he makes sales.
This chain continues on and on, which is how Herbalife makes
money. On YouTube another Herbalife
seller explains how he went from totally poor to being wealthy just by selling
Herbalife. Bill Ackman stresses the
point that it is this kind of action that makes Herbalife seem like a pyramid
scheme. If these sellers are selling
products to people who do not really have a need or want for the product then
they are committing an illegal action.
Ackman says that Herbalife is taking money from poor people and
promising them they can make it by selling them on the hopes and dreams of
becoming rich if they work hard and sell Herbalife products.
To
fight these accusations, Herbalife held a conference to explain that
everything Bill Ackman was saying was false.
Herbalife’s main reason that Ackman was wrong was that they have small
countries successfully selling Herbalife products; which would not be the
case if Herbalife were a scam because everyone would know it was a scam. Herbalife felt that it was wrong for Ackman
to short their company. Shorting a
company is necessary because it helps bring companies that are fraud to the
attention of the public. For example,
Bernie Madoff and his Ponzi Scheme would have continued going on if he were not
shorted. In the end, we cannot know
whether Herbalife is a pyramid scheme because we cannot track where their
products go and whether they are going to consumers who really want the
product.
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