Today Valeant Pharmaceuticals, in partnership with Bill Ackman and his Pershing Square activist hedge fund, went hostile in their endeavor to acquire speciality pharmaceuticals company Allergan, the maker of Botox. By filing an S-4 Registration statement with the SEC Valeant, which is led by its CEO Mike Pearson, formally commenced a hostile Exchange Offer for all of the shares of Allergan, giving up on the idea of first obtaining the agreement of Allergan’s Board of Directors.
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The formal offer is fundamentally on the same terms as the most recent proposed offer that Velant and Ackman published, of US$72 per share in cash and 0.83 of a Valeant share for each of the 297 million outstanding shares of Allergan, though the SEC filing now takes 205 pages of carefully drafted legal script to say so.
At todays US$118.40 Valeant share price the bid is worth in total some US$170 per share, or a little under US$51 million. As a sweetener Valeant still offers Allergan shareholders a, somewhat vague, contingent value right related to future sales of one of Allergan’s own products, DARPin, which is in the development pipeline – a case which the cynical might say may be a bit like bribing someone with their own money.
Last week Allergan had rejected the latest Valeant offer, its second bid-raise, and Allergan then also made an aggressive investor presentation questioning Valeant’s own business model, perhaps figuring attack is the best defense.
Not to be out-done, earlier this week Valeant made an aggressive shareholder presentation of their own, in order to to reestablish some momentum for their proposals. As a process, it seems, with hostile takeover bids there are some surprising similarities to a heavy weight boxing match, with investors sitting back in the audience waiting to see from which side the knock-out blow will come first.
The key difference between Valeant’s new formal Exchange Offer which is now on the table and which will remain open until August 15th, and their earlier proposals is that it does not need Allergan’s Directors’ approval and in fact simply goes over their heads by inviting Allergan shareholders to directly tender to it.
However plenty of other complexities still remain, including a number of Valeant’s own conditions. For one thing the Allergan shareholder rights plan, a.k.a. a poison pill, is still in place and which could heavily dilute anybody who tenders to the offer, if that means Valeant and Ackman should go over the 10% threshold where it kicks in.
As they are already quite close to that edge already, to deal with it Valeant and Pershing Square are also simultaneously launching a proxy battle to demand a special meeting of Allergan’s shareholders. Such a meeting will require a 25% favourable response by Allergan shareholders to the proxy request, with the additional, somewhat ambiguous, but possibly expensive, risk also that replying in favour could itself become deemed to be part of a joint arrangement that triggers the 10% threshold for the poison pill, something that is not, apparently, settled law.
Then, supposing a meeting is indeed called Valeant and Pershing would hope to prevail with a vote on their proposal to eject the current board in favour of their own nominees. If they should indeed prevail the new board would enable the poison pill to be dismantled and thus permit the exchange offer to proceed to a close – assuming enough people tendered for that too.
While that may be a necessary condition, it is certainly not by itself sufficient, however, as even if they get this far there are still other small matters, such as anti-trust clearances under American Hart-Scott-Rodino anti trust legislation, to take care of. And of course they would have to win over enough of the shareholders in the Exchange Offer, too, to gain control, and be able to induce a full merger afterwards.
Most important of all while all this is going on, which is likely to take several months of sustained legal warfare, at the operating businesses there is a risk that nobody may be minding the store too carefully in the meant time, as both sides risk focusing on takeover related skirmishes in the heat of the battle instead.
Then too, like planning blight in real estate where values can be depressed when there is sustained inactivity and neighborhoods deteriorate, the business development of one or other, or even both, of the two firms could stagnate, whether in sales and marketing, or in research and development or in delayed capital investments and the shares of both could suffer – so that whoever actually wins at the end could gain a pyrrhic victory.
In response to today’s announcement by Valeant and Pershing Square, Allergan has simply announced only that it will carefully review and evaluate the new Exchange Offer, and is advising its stockholders to take no action at this time pending that review, the results of which will be published to its shareholders when it is concluded
Behind the scenes, however, one can imagine that Allergan are casting around for some more weapons of war for their defense, to be supplied by their investment advisers Goldman Sachs who so far have been at the top of their game. Finding an alternative merger partner of their own could be a top priority for Allergan too, as a predator themselves perhaps, say, bidding for a candidate such as their British counterpart Shire, which a number of commentators have touted as a candidate and whose shares have risen accordingly. Or perhaps a more defensive “white knight” bidder can still be sought, to fall into the arms of someone larger than themselves, though none has shown up so far.
At the least if Allergan can bring in an alternative bidder to drive up the price further, and then just sell to the highest bidder the Allergan Board of Directors will certainly have done its job. If Allergan should actually succeed in persuading they shareholders of their growth plans, and manage to stay independent to deliver for the long-term, that will also be a different kind of coup, as it is a little uncommon these days of short term, financial engineering-led, thinking.
For Pershing Square’s Bill Ackman, and Valeant’s CEO Mike Pearson they have both invested a lot of prestige in launching this bid, so one must think they still have some firepower to put on the table if they really need to. As well, Valeant’s largest shareholder Robert Goldfarb’s Ruane Cunniff & Goldfarb, who still own over 10% of Valeant’s stock must be emotionally, as well as financially, invested in seeing Valeant continue on the path Goldfarb helped them embark on originally as an acquiror.