5 ways the settlement with the Federal Trade Commission could bode well for Herbalife.
1. No pyramids here.
By far the most positive development for Herbalife is that the government declined to label the nutritional supplement company as a “pyramid scheme,” which would have been a death knell for the firm. Chief Executive Michael O. Johnson went so far as to call the FTC settlement an “acknowledgment that our business model is sound and underscore(s) our confidence in our ability to move forward successfully.” He also noted that the company would not have settled if it felt the agreement jeopardized Herbalife’s existence.
2. Sure footing.
The settlement marks an end to the uncertainty that circled the company during the two-year probe federal authorities undertook to investigate a litany of complaints from former members of Herbalife’s multilevel marketing business. While the findings are certainly not flattering and the injunction restrictive, they are known quantities that allow Herbalife to move forward and commit to a definite plan. “It clears a big unknown from their balance sheet, at least in the short run,” said Ira Kalb, a professor at USC’s Marshall School of Business.
3. Icahn in fold.
Billionaire activist investor Carl Icahn remains staunchly in the pro-Herbalife camp. He issued a statement in the aftermath of the settlement saying he “always believed in Herbalife’s strong fundamentals.” The company also announced it had increased Icahn’s ownership limit from 25 percent to 35 percent. Icahn was already Herbalife’s largest shareholder, controlling more than 18 percent of its stock.
4. Private potential.
With Icahn’s ownership limit increased, some observers said the company could use this as an opportunity to go private and restructure before coming back to the public marketplace. The company has made no indication it is exploring this option, but the reduced degree of scrutiny on a private company could be helpful for Herbalife, said Randolph Bucklin, a professor at UCLA’s Anderson School of Management.
5. Better internal compliance.
In conjunction with the settlement announcement, the Herbalife board voted to create an internal oversight committee made up of heavy hitters, including a former FTC chairman. The company said the oversight committee represented the board’s “ongoing commitment to lead the industry while continuously improving customer protections and satisfaction.”
5 challenges the settlement poses to Herbalife’s structure – and perhaps its survival.
While language explicitly calling Herbalife a pyramid scheme was notably absent, you wouldn’t know it reading the regulatory body’s description of the company. Its detailed complaint filed in Los Angeles federal court noted that “the retail sale of Herbalife product is not profitable,” with FTC Chairwoman Edith Ramirez adding that the company would have to “fundamentally restructure its business so that participants are rewarded for what they sell, not how many people they recruit.”
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