The Battle over Herbalife

Bill Ackman knows how to get attention. Back in December, the derivatives investor disclosed he was shorting Herbalife with a $1 billion bet. His move caused Herbalife’s share price to plunge from the high 30s to the low 20s. Ackman called Herbalife’s business model a pyramid scheme that relies on recruitment of new participants rather than sales of products, to generate profits. He vowed to spend whatever it takes to inform people about the company. Herbalife responded with an investor presentation Jan. 10.


But yesterday, Third Point’s Daniel Loeb disclosed a long position of 8.2% of the company’s stock. Loeb argued that the company’s business model doesn’t constitute a pyramid scheme and that it is foolish to think that the Federal Trade Commission will move to shut down the company just because a billionaire hedge fund manager is suddenly complaining about it. He argues that Herbalife should trade between $55 and $68 a share or higher.


Robert Chapman of Chapman Capital is also long on Herbalife and disclosed his stake ahead of Loeb. He also bet big, putting more than a third of his company’s capital on the trade, according to published reports. In explaining his move, Chapman argued that Ackman slipped his “tell” in an interview on Dec. 20 about his short position, “confirming my suspicion that he already realized the FTC wasn’t going to make his day by shutting down HLF.”


Who’ll win the battle for Herbalife? Certainly not small, individual investors.