Bill Ackman, one of Herbalife‘s most prominent critics, was approached on behalf of billionaire investor Carl Icahn, offering his stakes in the company.
Ackman has over $1 billion stacked against the company, to which he commented that Carl Icahn’s presence is what’s keeping Herbalife afloat. Icahn holds 18.3 percent of the company.
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“With Carl exiting, I think the thing is over, and over quickly. The sooner he sells the better. I think he knows that this thing is toast,” stated Ackman.
Ackman foresees Herbalife’s demise
Herbalife faced a debilitating 7 percent reduction of its shares at the end of the week. Ackman and Icahn have been betting on Herbalife’s stocks for years, as Herbalife has been accused being a pyramid scheme, which would drive the company to a complete collapse in the near future. The Federal Trade Commission already approached the company and demanded a change in operations in order to differ its labeling as a pyramid or Ponzi scheme. This occurred a month ago, as Herbalife was forced to pay $200 million to avoid labeling by the FTC.
Ackman and Icahn have lashed at each other for quite some time, getting to the point where Icahn publicly called Ackman a “crybaby” and a “liar” in CNBC back in 2013, but the investing duo made the paces and ended their feud in 2014.
Reportedly, Icahn reached Ackman through the Jefferies Group, which has been desperately looking for investors that would buy Icahn’s stake. Icahn himself has not made any public statement regarding the allegations.
After Ackman revealed that Jefferies had approached him, Herbalife shares dropped another 5 percent. Although the company’s shares had increased 1.5 percent this year, the overall increase has pulled back around 9 percent only in August, which joined with Ackman’s statements, is immensely harmful to the nutritional supplements company.
Icahn’s actions act down the pyramid
On the other hand, Bill Stiritz, one of Herbalife’s largest stockholders, had stated that he trusted Icahn’s choices. Stiritz holds $211 million in the company, but Ackman also acknowledged that eventually Stiritz would also be forced out of the company due to its unsustainable operating scheme. Stiritz argues that Herbalife is “positive for society,” but he also appears to rely way too much on Icahn’s actions. The fact that Icahn is trying to sell his part of Herbalife is a cause of concern for the company’s stockholders and directive.
Pyramid schemes are business models that promise payments to its members for enrolling other people into the scheme. Pyramid schemes tend to not offer products or services like a regular company, but rather rely on recruiting levels that are eventually bound to stagnate, as most members will be ridden out of any profit. The FTC differentiates multi-level marketing (MLM) companies from pyramid schemes arguing that the former do have a real product to sell and are able to sell their product to the masses without having them join the scheme.
Herbalife does sell products to regular customers, but oftentimes the buyers are prompted to join the company’s system of sales, which is why it has been scrutinized as a theoretical pyramid scheme. “It’s best not to get involved in plans where the money you make is based primarily on the number of distributors you recruit and your sales to them, rather than on your sales to people outside the plan who intend to use the products,” warns the FTC.
Source: Yahoo Finance