THE HERBALIFE SHORT | Bill Ackman

So the second time round of consequence is a company called Herbalife. And Herbalife is a company that's reportedly in the nutrition business. They sell protein powder shakes, they sell vitamins, they sell herbal tea, they sell some nitric acid type things that supposedly are good for your heart. These are all commodity products. They're made by five, six, ten different manufacturers. You can buy them at your local pharmacy, you can buy them at your local GNC if they have that here, you can buy them at your local supermarket. The price you pay at your supermarket is about a quarter to a third of the price you pay for the Herbalife products. So who in their right mind would buy this overpriced stuff?

And Herbalife's number one product is called Formula One. You know, no one's ever heard of Formula One other than the race. And it competes with a product called SlimFast, which I guess many people in the room may have heard of. It's a product made by Unilever. SlimFast sells 100 million, 150 million a year. Herbalife ostensibly sells 2 billion of the same product. How is it that SlimFast sales have been coming down every year and the Herbalife product has been growing? It's sold what they call a direct selling model. And the way that works is, your name is Marianne. So Marianne comes to me and she says, 'Bill, don't I look terrific? I've been losing weight. I've got this product I've been using.' And I said, 'Wow, you look fantastic.' And she said, 'Would you like to try it?' Sure. A friend approaches me and says, 'Hey, you ought to try it.' And then she says, 'Hey, would you like to make a little money on the side?' And in this economy, who wouldn't want to make a little money on the side? And she convinces me to become an Herbalife distributor. And she tells me that if I sign up five friends, and each of them sign up five friends, and each of them sign up five friends, pretty soon I'll be collecting royalties and I can retire rich. Or if I'm less ambitious, I can make some little money on the side.

And as an unsophisticated, unemployed, low-income person, which is the target audience for Herbalife, this kind of pitch from someone I trust sounds appealing. And the unfortunate thing is that something on the order of 99% of the people lose money. There are about 50 that make 5 or 10 million a year. There are about a thousand that make a few hundred thousand a year. And the other 3.6 million lose, you know, anywhere between $300 and $3,000, $10,000, $20,000, $30,000. And it's really a money transfer scheme. It's a pyramid scheme. It's like a chain letter. When you got one when you were a kid, you know, send a dime to the following 11 people on the mailing list and then in three weeks you'll have a thousand dollars. If you think about what a Ponzi scheme is, it's a money transfer scheme without a product. A pyramid scheme is a money transfer scheme with a product. And they do smart things like put the Herbalife logo on football jerseys of famous soccer stars and they back various teams. That's very appealing to the Hispanic community, which is actually the target audience that they've been very successful with.

Now, unfortunately or fortunately, pyramid schemes are illegal. Now here's a pyramid scheme. It's got a $7 billion plus market cap. It trades on the New York Stock Exchange. It's been in existence for 33 years. How is it possible that this company could be a pyramid scheme? The answer is, it is. And in fact, they've used their tenure as a public company and the New York Stock Exchange listing and the imprimatur of Nobel laureates—they paid $15 million to serve as representatives of the company—and a lax regulatory regime in the U.S. to allow this pyramid scheme to grow to an enormous size. And the problem with pyramid schemes is they run out of victims and they inevitably collapse. And I can actually prove to the audience very quickly this is a pyramid scheme. And I'll do that by asking you a question. So Herbalife entered the UK in 1983, 30 years ago. Okay. Pepsi has been in the UK for a longer period of time, but after 30 years, Pepsi had a good quarter last quarter and they grew their sales at 3% in the UK. What do you think Herbalife grew their sales last quarter in the UK at? Let's have a guess in the audience. Raise your hand, there's no risk of being wrong. Yes? 1%. Okay. Someone else? 140%. That's interesting. Okay. 20%, 30%, 30%. The answer is sales grew 92% last quarter. And how is it possible that—I mean, maybe people are getting fat at an incredible rate here, I mean—but absent that, the reason why it grew very quickly is they found the new immigrant population to go after. And this is a product where there is a boom as people get recruited and then very quickly when the population gets saturated, it collapses. Right now, the UK business grew enormously and then collapsed and now it's beginning to grow enormously again. I don't know, maybe the Vietnamese population. You know, I was with one of my investors and he said, 'You know, I think the women who work cleaning the office are Herbalife distributors.' And I met with them. And people are convinced to become Herbalife distributors that you have to buy $3,000 worth of inventory in order to start getting these royalties. And what it is is effectively an inventory loading type scheme. So anyway, that's what the business is. We did, you know, probably 18 months worth of work before we came public. We hired one of the best law firms in the country, Sullivan & Cromwell, to do their own independent evaluation. If I'm going to publicly accuse them of being a pyramid scheme, I certainly would like the legal backing of one of the top law firms in the country. And both we and Sullivan concluded it was a pyramid scheme. And on December 20th, I made a public presentation. And there's a website called Facts About Herbalife. You can watch the presentation. There's lots of other data there. And so far, so good until Carl Icahn came along and bought 16% of the company, said it was totally wrong. And it seems like every day he goes on CNBC and says what a great company it is. And every time he says that, the stock goes up another couple of dollars. And in the meantime, the company's reporting very good financial results. But I'll make a prediction. And I don't know if I'm back here in a year, maybe let me invite you back. Okay. This business will be shut down. Okay. This business will collapse. I can't give you the precise date, but we will have made progress in that direction within 12 months. So that's my prediction for today. And the profits will go to the Pershing Square Foundation. And maybe Peter has some other idea for another Oxford program. There you go.