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.