The activist manager, William A. Ackman, of Pershing Square Capital Management believes that the company, Herbalife, operates, at least in some part, as a pyramid scheme. This permits some of its sales staff and officers to generate large commissions for themselves at the expense of the company’s interest. At the same time that Pershing Square released a report concerning the “the deceptive practices and recruitment systems” used in hiring by the nutritional supplement company, Ackman has made a $1 billion short-selling bet against Herbalife. Investors engage in short-selling when they take a position betting that a stock will lose its value.
The pressure from Ackman has forced Herbalife to revise a stock buy-back plan it previously announced in order to stabilize its position. It now plans to buy back $1.5 billion worth of shares, an increase from the earlier plan to repurchase $1 billion of shares. Herbalife seeks institutional investors, such as Bank of America and JP Morgan among others to purchase senior convertible notes worth a billion dollars to finance the buyback. The notes would mature in August of 2019. The fact these instruments provide these investors with a senior position renders them attractive because, if Herbalife becomes insolvent or bankrupt, they would have a superior priority to recover the sums due upon maturity.
While Herbalife’s stock price showed some modest improvement in the fourth quarter of 2013, Pershing Capital intends to release other information attacking the company’s compensation structure in an effort to undermine the stock’s performance. If successful, Ackman seeks to gain considerably from Pershing Capital’s short bets. Ackman may get an assist from Senator Ed Markey of Massachusetts. In response to constituents’ complaints about the company, he is asking regulators to investigate Herbalife. This investigation could provide the grease necessary to drive the share prices down even more.
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