Herbalife Called a Pyramid Scheme but Finishes Year Strong

Herbalife

Herbalife shares rocketed on news that the re-audit that was recently performed made no significant changes to the company’s financial reports dating back to 2010. The health-product company’s shares soared nearly a full 10 percent on the positive marks received from PricewaterhouseCoopers LP. While Herbalife and its associate celebrate the stock’s recent surge, hedge fund manager William Ackman and friends are not so impressed. Ackman has his reputation along with a significant portion of his finances riding on a bet that Herbalife will be shutdown by regulators for being, in his determination, a pyramid scheme.

Herbalife, primarily a nutrition and weight-loss company, released the news that auditors had reviewed its records dating back to 2010 and found it necessary to make no material changes to the financial reports. Investors looked quite favorably on this news as shown by the resulting spike in the company’s share price. As a result of the good news, shares enjoyed a 9.4 percent boost to close regular trading at $74.83.

The positive recent results are due to an audit which had to be performed by PricewaterhouseCoopers instead of Herbalife’s previous auditor KPMG. The latter had to call itself off from representing the health-product company due to an insider trading issue it discovered within its ranks. This is not the only squall Herbalife has had to sail through during its voyage on the corporate seas however. For some time now the company has seen storm clouds forming on the horizon due to the news that William Ackman, of Pershing Square Capital, has taken a bold short position on their stock. Ackman publicly expressed his bleak outlook for Herbalife’s future late last year, predicting that the stock would eventually be worth absolutely nothing. Ackman’s position is motivated by his belief that the company is actually a pyramid scheme.

A pyramid scheme, similar to a ponzi scheme, is a system under which income is derived not by providing a market with any sort of real value, but primarily from the recruiting of new members whose membership fee, and the commissions paid on it, entail the primary source of income. In a pyramid scheme, the unsustainable structure is focused on generated revenue from recruiting rather than on providing any type of product or service to a market. Ackman and Pershing Square Capital have stated that they believe regulators will eventually label Herbalife as one such pyramid scheme, and that the result of that action will be a total collapse of its share price.

Herbalife, despite being called a pyramid scheme by Ackman, seems to be finishing the year pretty strong. The company is a multi-level marketing firm which has focused itself on the weight-loss and health supplement market. It operates through an international structure of distributers and associates, and has enjoyed quite a bit of success over the last year. Closing at just under $75, shares have enjoyed a more than 120 percent rise over the last year.

Herbalife’s journey has an important hurdle that it must deal with if it is going to enjoy its recent success far into the future. The looming position taken by Ackman and Perhsing Square Capital stands firmly in between Herbalife and any lofty goals the company may have for its future.

Ackman has publicly stated his belief that Herbalife is just another pyramid scheme waiting to be sniffed out and shutdown by regulators in due time.

Herbalife, in efforts to dispel the claims made by Ackman, has repeatedly denied any notion that it is a pyramid scheme. Ackman however is not convinced in the least bit, and despite incurring heavy losses already, has restated his commitment to see his position through to the very end. His determination has already been tested, as Herbalife shares have risen nearly 60 percent since Ackman publicly announced that he would be taking a significant short position on the company.

Despite Ackman’s statements calling Herbalife a pyramid scheme, along with his actions in shorting the stock, there are other big-hitters in the hedge fund world who sit opposite to Pershing Square Capital that are singing a totally different tune. Although Ackman has taken a big position and made bold statements regarding Herbalife’s future, other big players like Soros Fund Management and Carl Icahn paint a positive future for the company, even going so far as to suggest it is a no-brainer buy and is undervalued.

Despite it having the support of Icahn and others, Herbalife will have to survive Ackman’s position and his claims if it intends to find and enjoy real longevity and sustained success in its future. Time, the ultimate truth teller, will eventually reveal what awaits Herbalife and all of its stakeholders. For now, lots have been cast, and as the fiscal year draws to a close, Herbalife appears to be the temporary winner with a late stock surge on the positive news of its recent audit.

Stakeholders, as well as other interested parties, are eagerly waiting to see how this drama will ultimately play out. Investors and management however are happy with the most recent scenes, which included a positive audit and significant stock surge.

By Daniel Worku

Businessweek

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