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Communications Challenges of the Valeant/Pershing Square Bid for
Allergan
The bid by
Valeant and Pershing Square to acquire Allergan has made a very big
splash in the M&A and corporate governance world. In brief, Pershing
and Valeant have teamed up in a campaign to pressure Allergan to sell
to Valeant in an unsolicited cash and stock deal. What distinguishes
the Valeant/Pershing deal from a conventional public bear hug (such as
Pfizer’s recent effort to acquire AstraZeneca) is that, by
pre-arrangement, Pershing Square acquired a 9.7% equity stake in
Allergan immediately prior to the first public announcement of
Valeant’s bear hug. This unusual deal structure is a first and, if
successful, may pioneer a new paradigm for unsolicited takeovers of
public companies.
The
initial public reaction to the deal largely ignored the financial
merits of the bid and instead focused on the legality and legitimacy
of Pershing’s acquisition of a 9.7% stake in the target based on
Pershing’s knowledge of the impending bid at a time when the market
was ignorant of the bid’s pendency. In the resulting debate two camps
quickly emerged. One argued that if the Pershing buying program was
legal, the law should be changed. This camp focused on the perceived
unfairness of permitting a non-bidder third party to profit at the
expense of existing shareholders through use of non-public information
it acquired from the bidder. The other camp focused on existing law,
which it asserted clearly permitted Pershing’s activities, and
bestowed kudos on Valeant and Pershing for being innovative and
audacious.
As
interesting as this debate may be, it is at best a side show and at
worst a detriment to the success of Valeant’s unsolicited bid for
Allergan. Because Allergan adopted a poison pill in response to
Valeant’s unsolicited bid, Valeant can prevail only as and when it can
convince the Allergan board that more value can be created for
Allergan shareholders by selling the company than by continuing its
independence. Valeant’s leverage in this effort lies in its ability to
persuade a majority of Allergan’s shareholders to support Valeant’s
bid in a shadow or actual proxy contest to elect at least a majority
of new Allergan directors. To make matters more complicated for
Valeant, it must also offer a sufficiently pre-emptive price to induce
the Allergan board not to solicit third party bids or, failing that,
it must be prepared to outbid all comers in an auction-type setting
where it may not be afforded the same non-public information about
Allergan provided to other bidders.
Pershing’s
support of Valeant’s bid brings two arguable advantages to Valeant.
First is Pershing’s almost 10% stake in Allergan—a stake which under
the agreement between Valeant and Pershing will be voted in favor of
Valeant’s positions regarding the proposed acquisition. While a 10%
toehold in a target always has this advantage, over the last 30 years
unsolicited bidders have almost universally refrained from acquiring
such a stake, calculating that its help in fashioning a majority
shareholder coalition to support the unsolicited bid is not as
important as the negative reaction it almost certainly will engender
in the target’s board room. Obviously, Valeant has chosen not to
adhere to conventional wisdom.
The second
possible advantage Pershing brings to Valeant’s unsolicited bid is
Pershing’s considerable reputation as a savvy investor which
thoroughly researches its investment thesis before it acts. The bulk
of Valeant’s proposed deal consideration consists of Valeant stock,
not cash. Presumably, both Pershing and Valeant calculated that
Pershing’s active support of the proposed combination would help
convince institutional investors to accept Valeant’s business case
that a combination of the two firms would represent a superior
investment vehicle for Allergan’s shareholders than a stand-alone
Allergan.
Indeed
this is exactly how the next stage of the takeover contest is shaping
up. Valeant and Pershing are each circulating to Allergan shareholders
extensive PowerPoint presentations setting forth their investment
theses that a combined company will provide higher value to Allergan
shareholders than Allergan on a stand-alone basis. Allergan has
countered with its own PowerPoint presentation arguing the superiority
of the company on a stand-alone basis. Valeant and Pershing have begun
a road-show to make their case in person to the larger Allergan
shareholders, and Allergan has mounted a counter road-show. To “call
the question,” so to speak, Pershing is also commencing a straw-poll
type proxy contest by seeking a non-binding majority vote of Allergan
shareholders to support the Valeant bid. In short, both sides are
trying to win the hearts and minds of a majority of Allergan
shareholders, a contest that depends on the relative effectiveness of
the parties’ communications arguing the superiority of their competing
business plans.
In this
context, Pershing’s rapid stock accumulation may come back to haunt
it. After all, the aggressive buying program immediately prior to deal
announcement occasioned a storm of negative press coverage based on
the perceived unfairness of Pershing’s use of non-public information
to the detriment of the investing public. While many lawyers rushed to
defend the legality of the tactic, its legality clearly did not win
the battle in the court of public opinion.
Moreover,
investors who were selling Allergan stock (directly or as
counter-parties to derivative transactions) during the period of
Pershing’s purchases surely have a bad taste in their mouths since
they were the ones “victimized” by the tactic. Looked at from an
investor’s point of view, knowledge of Valeant’s pending bid provided
Pershing an opportunity to appropriate approximately $1 billion of
profit (and more if a bidding contest ensues) from the shareholders of
Allergan who sold to Pershing prior to the announcement of the bid. In
Wall Street vernacular, Pershing’s support for Valeant can be seen as
having been paid for with “other people’s money.”
Another
communications challenge for the success of Valeant’s bid is that
Ackman’s reputation as a savvy activist investor might not be given
full credit by the institutional investor community for other reasons
as well. Institutional investors are not likely to miss the fact that
Ackman’s role in this situation is very different from his customary
activist game plan, which consists of identifying and pursuing
structural and operational reforms at companies which, when achieved,
create added shareholder value. In the Allergan situation, Ackman is
not relying on his proven skill-set of diagnosing company
inefficiencies, but rather is acting on an investment thesis based on
the merits of a pro forma M&A combination, an analysis far more
typical of traditional long investment advisers.
Further,
Ackman’s credibility with Allergan shareholders may be compromised by
the recognition that Ackman is bound to Valeant only so long as
Valeant is pursuing a takeover of Allergan. The moment a rival bidder
arrives with a bid superior, Ackman is free to vote for or sell to the
higher bidder. The history of unsolicited takeover bids since the
creation of the poison pill instructs that there are usually two
phases. In the first, the target tries to defend its independence by
arguing that more shareholder value will be created by staying
independent than by being purchased on the bidder’s terms. If the
target fails in this effort (which is by far the most common outcome),
it usually will do anything in its power to find an alternative higher
bidder. There is no reason to think that Allergan will behave
otherwise, particularly because of the highly aggressive nature of
Pershing’s tactics.
This
predictable end game may cast doubt on the strength of Pershing’s
belief in Valeant’s business thesis about the value creation
possibilities of the combination. In effect, Pershing has put itself
in an enviable position of winning even more if Valeant’s bid is
topped by a third party. While Ackman clearly has bet well over $3
billion, his bet is not on Valeant’s business thesis as much as it is
a bet on Allergan not being able to remain independent.
While the
end-game for the Valeant unsolicited bid is still probably months
away, it does seem that Valeant and Pershing have at best a mixed
record in the first round in the communications battle to win the
support of the remaining 90% of Allergan’s shareholders. Many
observers will quickly say that at the end of the day those investors
will be swayed only by the highest bid, and they are undoubtedly right
in this view. But this view misses the point that in a takeover
battle, getting to the end game of the highest bid (or a successful
just say no defense) is rarely simple and linear. As a deal
progresses, the sentiments of investors can and often are swayed by
their perceptions of the tactics engaged in by the
contestants—perceptions fashioned by a combination of communications
and visceral reaction to the parties’ stratagems. Right now, Valeant
and Pershing have a mixed scorecard in this arena.
Charles Nathan
Senior Advisor
RLM Finsbury
1345 Avenue of the Americas
New York, NY 10105
Telephone +1.646.805.2015 Mobile +1.917.488.8565
Charles.Nathan@rlmfinsbury.com
www.rlmfinsbury.com
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