In mergers, as in horror movies, it often comes as a shock when the menace comes from someone close to the victim.
So it was a surprising – and to many, baffling – move on Wall Street on Tuesday when Bill Ackman, a billionaire Wall Street hedge fund manager, arranged a flashy, nearly four-hour presentation where he revealed himself as the driving force behind Valeant Pharmaceutical’s $47.5bn hostile takeover offer for its rival Allergan, the maker of Botox.
The twist: Ackman is Allergan’s largest shareholder, with 9.7% of the company’s stock in his hands. That made for many questions as Ackman sat up on stage for hours as a teammate with the executives of Valeant, with the logo of his Pershing Square plastered atop the 65-slide presentation.
Ackman’s unusual goal is to use his ownership in Allergan to politely bully the company into accepting Valeant’s offer.
“We buy stakes in companies and we help them do the right things for shareholders, and that’s what we’re going to do here,” Ackman told an investor on Tuesday.
“And we have ways of making that happen,” he added with a slight smile.
Allergan has yet to respond to the cash-and-stock offer, which is a 40% premium to the company’s stock price. Valeant has already lined up $15.5bn in financing from Barclays and RBC.
Both Valeant and Allergan make products that are – as is Ackman himself – beloved of New York socialites. Allergan’s Botox neurotoxin and Juvederm filler are popular youth-preservers among the moneyed set, while Valeant makes rival fillers Restylane and Perlane. Valeant is also known to dermatologists as the owner of wrinkle creams Renova and Retin-A Micro. The two companies have a shared past: in the past, Valeant’s sales team – known for its presence in foreign markets like Asia and Russia – had a contract to sell Botox in Poland.
If the deal goes through, Valeant promised to sell off Restylane and Perlane, as well as another filler, Dysport, to make room for Botox.
The flashy presentation seemed at odds with Valeant’s protectively tended image as a thrifty company.
Valeant’s chief executive, J Michael Pearson, seemed abashed by the kind of attention that Ackman regularly courts. “Valeant still worries about every penny, and this whole production is being paid for by Bill Ackman,” Pearson said. “This must be what it feels like to be at a big pharma company. This will never happen again.”
Ackman, along the same lines, told investors about ordering a burrito from Chipotle during the negotiations, only to have Pearson pop his head into the room and ask Ackman for $20 to pay for it.
On a darker note, Pearson also highlighted Valeant’s frugality by highlighting the executive and administrative layoffs he plans to make if the two companies successfully combine. “These are not people touching the customers. they are people sitting in offices. and we don’t need people sitting in offices,” Pearson said. He expects layoffs and other cost cuts to result in $2.7bn in savings, 80% of them in the first six months after the deal.
Still, Pearson and Ackman enjoyed a kind of locker-room banter. When one investor asked Pearson: “why team up with Bill, as charming as he is?” Pearson shot back, “He’s charming?” before explaining, “he’s investing $4bn in us.”
Bonhomie aside, getting the deal done won’t be easy. There are several challenges.
One is Valeant’s aggressive accounting, which rejects the standard audited measure of US financial statements, which is known as GAAP.
"We don't care about GAAP earnings,” Ackman said, adding, “if you look at GAAP earnings, [Valeant] looks like a disaster heading into bankruptcy." He said he favored measures of the company’s cash flow instead as a metric of its economic health.
Another potential sticking point is Ackman’s technique – buying the shares of Allergan while working with a potential acquirer. It startled even Wall Streeters who have seen it all and made some veteran traders queasy.
Ackman, who chose the theme “The Outsiders” for the presentation and sprinkled quotes from bold CEOs throughout the presentation, is very much an insider on the deal.
“We got access to inside information, which we don't typically get when looking at an opportunity,” Ackman said of his talks with Valeant. Inside information is a loaded term on Wall Street, where investors aren’t allowed to profit on nonpublic information.
Ackman, who offered six pages of disclaimers on the deal, said he took an interest in Allergan after finding out Valeant wanted to take over the company. Subsequently, his steady accumulation of Allergan’s shares boosted the stock price from $116 to $142 in a few weeks.
“I know this is going to raise eyebrows,” said Keith Moore, the managing director of Wall Street research firm MKM Partners, adding: “This is obviously a new-twist tactic where an activist teams with the buyer.”
“This is aggressive in a way that makes the arbs blanch, and we aren't exactly shrinking violets,” said another trader.
Suzan Jo, a partner with law firm Duane Morris, said Ackman’s technique, while unusual, was most likely legal because his intent was to acquire an ownership stake in the company, not flip the shares. Ackman also filed the right documents with federal regulators.
“His share accumulation was disclosed the entire time,” Jo said.
By all accounts, Allergan is a vulnerable target, according to Moore of MKM Partners. One of Allergan’s best defenses against hostile takeovers, a “poison pill,” lapsed in 2010. The poison pill, which had been in place roughly since 1989, is a protection technique that deters hostile takeovers by making a company’s stock prohibitively expensive to buy. The company’s board of directors is also re-elected every year, which makes them vulnerable and easy to replace.
The Valeant-Allergan offer – which Ackman dubbed Val-Gan – is the activist investor’s first foray into the pharmaceuticals industry, but it is unlikely to be the last. He said Valeant is already in talks for its next acquisition, and proposed a passel of high-profile pharmaceutical companies, including Merck and Johnson & Johnson, as future takeover targets.
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