Three weeks ago Quebec based pharmaceuticals company Valeant made a US$47 billion hostile takeover bid, in cash and stock, to acquire Irvine California based specialty pharmaceuticals company, and maker of Botox, Allergan.
Valeant was joined in the bid by hedge fund Pershing Square, which is led by activist investor Bill Ackman. Bill Ackman even managed to raise a few eyebrows when he separately disclosed he had quietly built up a substantial position of almost 10% himself, even with knowledge of the pending bid. His reasoning, which many accept, is that as a joint bidder with Valeant he was entitled to do just that.
Allergan’s reaction to the bid was to correctly announce simply that they would study it. Probably it is fair to say they have been flapping around for alternatives since, including the possibility of finding a White Knight to rescue them from the warm embrace of Valeant’s CEO, Mike Pearson, and of Robert Goldfarb, who is Chairman and CEO of Ruane, Cunniff & Goldfarb and who also happens to be one of the largest shareholders of Valeant.
Now today, Allergan has finished its study period and come out swinging against the deal instead, announcing that its Board of Directors unanimously rejects the unsolicited proposal from Valeant.
In the phraseology with which these matters are typically expressed, Allergan states that the Valeant proposal substantially undervalues Allergan and is not in the best interests of its shareholders.
After what it terms a comprehensive review, conducted in consultation with both its financial and legal advisors, the Allergan Board also concludes that the proposal from Valeant creates significant risks and uncertainties for the stockholders of Allergan as well.
Finally, Allergen is also now coming on very strong, with bullish predictions of how well the company can perform financially while remaining as an independent company moving forward. Such positivism is indeed something it needs to employ in order to fend off a well heeled, but unwanted, intruder such as Valeant.
Accordingly, Allergan now states officially it expects to increase its own earnings per share by 20 to 25 percent and continue to generate double digit revenue growth in 2015.
Thereafter Allergen also says it expects to produce double digit sales growth and produce earnings per share compounded annual growth of 20 percent over the next five years.
As to how it expects to get there, Allergan says these numbers are achievable as a consequence of strong business momentum driven by a wide array of recent approvals and anticipated near term approvals. The company also asserts it is in a position to produce meaningful additional leverage and scale across both the two major categories of expenses, S, G&A and R&D, without negatively impacting its commitment to deliver the highest quality outcomes to customers and their patients.
Strong talk, and you might say that with his almost 10% position Bill Ackman has thus already done his activist job of stimulating change, without a shot being fired in serious anger. Slashing of administrative costs and cutting back R&D, now Allergan will just do it all for him.
Ackman’s shareholding would then presumably be a major beneficiary even without the Valeant bid. Not so much fun for Valeant CEO Mike Pearson, however, especially if Allergan now succeeds in proselytising its views amongst its institutional shareholder constituencies and can then actually deflect the bid.
Allergan has also put together a detailed presentation of its views, which a little ironically is actually a reversal of the standard activist play book, with which to shoot down the Valeant proposal – a proposal which would of course increase risk by entailing substantial indebtedness being incurred as well.
Allergan’s statement today then concludes with the words of David E.I. Pyott, its Chairman of the Board and CEO, “After careful review and consideration, our Board of Directors has unanimously determined that Valeant’s unsolicited proposal substantially undervalues Allergan and does not reflect the value of the Company’s leading market positions, sales and marketing foundation, industry-leading research and development efforts, as well as future revenue and earnings growth, ” he said, before adding,
“Allergan has a long history of producing consistent growth and delivering solid results through a combination of innovation, execution and discipline. We are confident in our ability to extend our track record, enthusiastic about the opportunities before us, and believe Allergan is well positioned to deliver compelling value to our stockholders. Furthermore, the Board has determined that Valeant’s proposal creates significant risks and uncertainties for Allergan’s stockholders and believes that the Valeant business model is not sustainable.”
Accordingly Allergan has now thrown down the gauntlet to Valeant by sending a letter expressing all of these views, together with their rejection slip, directly to the Valeant CEO Mike Pearson.
As for Bill Ackman, when the Valeant bid was announced he said at the time “The combination of Valeant and Allergan represents the most strategic and value-creating transaction I have ever analyzed, ” adding, “I strongly urge the Allergan Board of Directors to carefully examine the proposed transaction and enter into negotiations with Valeant so that a merger can be consummated promptly.”
If Ackman and Valeant thought Allergan would just roll over and concede, they certainly no longer have that opinion. Now we will see who gains the most institutional shareholder support in the weeks ahead, which will determine the fate of both the Valeant offer and the future of Allergan.