Herbalife defends itself against manager claims

Friday, January 11, 2013

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NEW YORK, USA — Nutritional supplements maker Herbalife came out swinging yesterday against claims made by hedge fund manager William Ackman that the business amounts to a pyramid scheme.


But Ackman didn't back down, saying in a statement that Herbalife "distorted, mischaracterised and outright ignored large portions" of Pershing Square Capital Management's December presentation.


A series of Herbalife's executives looked to refute Ackman's allegations during an analyst and investor meeting earlier in the day, laying out everything from how the business operates to who its customers are.


Critics have questioned the company's business model, which uses a network of distributors to sell its nutritional supplements and weight loss products in more than 80 countries.


The defence put forth yesterday comes a few weeks after Ackman alleged Herbalife Ltd was a pyramid scheme and that he was shorting the stock. Short-sellers make money when the shares they're betting against decline.


Under a pyramid scheme, a company makes most of its money by recruiting new salespeople, rather than on the products that they sell. Aside from Ackman, Greenlight Capital's David Einhorn had also raised concerns about Herbalife's business in May.


Herbalife President Desmond Walsh said yesterday that over its 32-year history, only one court has ruled that the company runs an illegal pyramid scheme. The ruling, which occurred in Belgium, is being appealed.


Walsh said that ruling has not hurt Herbalife's business in the country. He also balked at Ackman's claims that Herbalife uses a "pop-and-drop" approach to the markets it serves -- entering a market, making money as fast as it can and then pulling out and moving on to new markets. Walsh said this is not true and that much of Herbalife's growth is coming from markets it has served for more than 10 years.


Herbalife Chief Operating Officer Richard Goudis looked to debunk Ackman's claim that Herbalife is not a product company. The executive said that the Herbalife invested US$44 million into research and development, technical infrastructure and other areas to support its products last year.


Goudis also said Ackman's claim that Herbalife's shakes are more expensive than its rivals was caused by the hedge fund manager using a price-per-serving measurement that the company does not feel is accurate, and argued that Herbalife's shakes are competitively priced against rivals like GNC.


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