Valeant may have antidote for Allergan's 'poison pill'
Late last month, The New York Times reported that mergers and acquisitions had reached a level not seen since before the financial crisis of seven years ago. Although the pharmaceutical industry was not one of the industries mentioned in the article, it also has been the focus of major M&A activity -- including a deal that reaches the "colossal" status mentioned by the Times.
That colossal deal being proposed is the attempted takeover of Allergan by Valeant Pharmaceuticals. Valeant is aligned with Pershing Capital, a hedge fund that owns almost 10% of Allergan’s stock and is run by investor/activist Bill Ackman. On April 22, Valeant made a $45.7 billion offer for Allergan, and since then has bumped the offer to $53 billion.
Allergan has rejected every offer and is attempting to hold its own against what has clearly become a hostile takeover bid. Upon refusal of the offer, Allergan’s management said that the offer “substantially undervalued” Allergan and that Valeant’s business model was based on gobbling up acquisitions and starving them---a model that Allergan has repeatedly called unsustainable.
The poison pill defense
As this saga has continued to unfold for the last two-plus months, the tactics have become more aggressive.The latest move by Allergan—invoking the “poison pill” defense---is a tactic intended to stop a hostile bid or cap ownership so that no one person or entity is able to own a large percentage of a company’s shares. A poison pill is a shareholder rights plan that allows existing shareholders to acquire stock at a lower price, assuming that a powerful shareholder triggers execution of the plan by acquiring more than a certain percentage of stock.
Based on Allergan’s shareholder rights plan, once a person or entity (such as Pershing Square for example) owns 10% or more of its shares, existing shareholders have the right to buy additional shares at a lower price. The net effect is diluting the value of each share and making a takeover more expensive. While it is true that Valeant cannot stop Allergan from using this defense strategy, it has successfully taken its case to the courts in order to be able to force a vote among shareholders -- and that, ultimately, may prove to be the antidote to Allergan's "poison pill."
What creates value—and what takes it away?
While it’s not clear what comes next, there is certainly more to come. While Valeant claims that it would be able to maximize the assets and portfolio of products that it would gain in a buyout of Allergan, Sommer looked at research from René Stulz, professor of finance at Ohio State University.
Stulz notes that, in general, decade in and decade out, shareholders of public companies lose a lot of money as the result of mergers and acquisitions. The stock being acquired may go up during the short term, but overall the net effect is the same -- net loss of value.
David E.I. Pyott, Chairman of the Board and CEO of Allergan, has stated that Allergan has always acted in the best interests of it shareholders. He continues to focus on the ability of Allergan to create more value than the Valeant proposal could. It all comes down to value—and to the interplay between two very different sets of corporate values.