In SEC Filing, Ackman Makes His Case

07-15-10 © george tsartsianidisAt least Valeant is now trying to make money the old-fashioned way: by buying an operation that knows how it’s done. Not too long ago its precursor, Biovail, was known for its conspiracy theories about the short sellers who were supposedly causing all its problems, and its lawsuit against the research/analysis firm that had uncovered the real source of those problems in its own performance and books.

Ah, the good old days.

After a starring turn in a 2006 “60 Minutes” program (in which the producers left unquestioned the company’s own self-image) Biovail collapsed of its own weight, and inspired a memorable MarketWatch column by Herb Greenberg that warned “public companies that monkey with their numbers” that filing lawsuits against their critics “almost always backfires.”

Biovail had little choice but to merge with Valeant in 2010. Formally, it was Biovail that did the purchasing, Valeant that was purchased, but the combined entity took on the cleaner name.

The back-and-forth

That brings us back to its new and better strategy: buying enterprises that know how to make money., Valeant purchased Bausch & Lomb last year, and on April 22d this year Valeant proposed that it acquire all the outstanding shares of Allergan [best known for Botox and Restasis] for a combination of stock-swap and cash: each share of Allegan to be valued at 0.83 share of Valeant and $48.30 in cash. Allergan shareholders would end up with 43% of the combined company.

The fly in the ointment is that Allergan isn’t on board.

Valeant, though, has a valiant ally, experienced in wielding a pen in such matters: Bill Ackman. Ackman recently has filed with the Securities and Exchange Commission his May 19th letter to Michael Gallagher, lead director of the Irvine, California-based drugmaker Allergan (NYSE:AGN). The letter makes the case that Allergan was wrong to reject the buy-out offer from Valeant Pharmaceuticals.

Much is at stake in reshaping the face of … the world’s faces. Botox alone achieved sales of nearly $2 billion last year.

Ackman is the principal of Pershing Square, which owns 9.7% of Allergan’s equity. The deal is structured so that Pershing Square is more of a co-bidder than a seller: it will not receive a cash payment for that stock – rather, it will be paid in the equity of the combined company alone.

On May 12th, Allergan’s board announced its view that the proposal “substantially undervalues Allergan, creates significant risks and uncertainties for the stockholders of Allergan, and is not in the best interests of the Company and its stockholders.”

The first bold-faced heading in Ackman’s letter reads, “Chairman and CEO David E. I. Pyott has a disabling conflict of interest.” What follows is in a sense disappointing: the only conflict Ackman alleges is that Pyott will lose his leadership role upon a takeover.

Gallagher and Two Meddlers

Thus, Ackman says, he has tried to discuss the Valeant bid with the lead independent director of the Allergan board, the man to whom the letter is addressed, Mr. Gallagher. He is unhappy that he wasn’t allowed to speak to Gallagher without meddling third parties.

On April 24th, he participated in a phone call with Gallagher. But Pyott was also on the line, as was the SVP of Investor Relations, Jim Hindman. “I find it inappropriate that Allergan’s lead independent director was unwilling to speak to a shareholder without management present,” Ackman writes.

Ackman did get an opportunity to speak to Pyott one on one, but that lasted only 15 minutes and he found Pyott less than forthcoming. Apparently, the CEO simply repeated the conclusory statements that he’s also been making to the world and that the company has been making in its releases, that the bid is a low ball.

After governance preliminaries are out of the way, Ackman turns then to the substance of the dispute: why in his view the bid is a reasonable one, not a low ball, but squarely in the strike zone. Both companies are active in “dermatology, ophthalmology and aesthetics,” which offers a lot of synergy for the combination. Valeant also has features that Allergan needs, such as a “low-cost operating model” and a shareholder-oriented system of corporate governance, that will allow it to generate “spectacular total returns to its shareholders” with the combined firms’ assets.

Valeant’s offer caused a rise in Allergan’s stock price of roughly 40%, or $50, from $120 before the offer to $170 at the post-offer peak. Given this price rise, Ackman says, the board has failed in its fiduciary duties by “(1) not properly considering the Valeant proposal, (2) its designation of Mr. Pyott as the only representative of the board permitted to interact with shareholders, and (3) the lead director’s and board’s unwillingness to speak or meet with the company’s largest shareholder without management present.”

A Wrap-Up

The maneuvering is surely not at an end. Valeant expects to announce an improved offer, and the general understanding is that the improved offer will again be a mix of cash and stock-swap, although perhaps the cash portion of the mix will be larger. Valeant ruled out one possibility on Tuesday, May 20th, saying, “the improved offer will not be an all cash deal.”


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