Glossary of Hostile Takeover Terms with Discussion

Hey guys, been away from the board for a while; thought I'd stop by.

I did want to comment a bit about the Indian tribe deal.

I think anyone who've read this board for a while knows I'm allergic to legal and accounting gimmicks. Every activity needs to either create some new product or produce an old one more efficiently. This deal doesn't create any economic value; it is just some sort of an arrangement that is supposed to outsmart patent laws. In that respect, I lump it together with inversions (that were supposed to outsmart tax laws), channel stuffing (that were supposed to outsmart public accounting laws), secretly controlled pharmacies (that were supposed to outsmart insurance laws), and likewise deals. And, we all know how those have turned out.

Even if legally valid at the time (and that's clearly debatable), judges, regulators, lawmakers, and other rules-setting constituencies are going to be unsympathetic and find ways to close the loopholes sooner rather than later.

When a deal that doesn't create overall value is put into place, the benefit it generates to its creators can only be at the expense of someone else -- that someone else (a competitor, an investor, a national treasury, etc.) is consequently being prevented (at least in part) from creating value (which is what most entities do most of the time). It thus becomes, as a matter of public good and existential preservation of a constructive economic order, the duty of the rules-setting constituencies to protect the value creators from the value destroyers.

It never surprises me when rules are being changed to kills those gimmicks; what does surprise me is seeing ultra-sophisticated investors and managers sink vast amounts of money into these gimmicks and are then genuinely shocked when their efforts are frustrated.

I don't care what the rule lawyers say. Rules can -- and will -- change, retroactively if necessary. If a contemplated deal doesn't create overall value, my advice is DON'T DO IT! It's not a matter of being a good corporate citizen (not to discount such motivation), it's just a matter of realizing that above the rules are the rule setters; and that those who create value have more sway with the rule setters than those who destroy value. It doesn't matter if the rule setters are as clean as a whistle or as corrupt as a Byzantine bureaucrat; the value creators have more to offer than the destroyers; so, in the end, they will win almost every time.

Have a great holiday season, everyone!

Dan.

 

I agree, looks like a small amount to me.

Here is my math:
(Numbers are mostly from memory, but should be fairly close to the actual ones)

• (Legacy) Allergan had about 300M shares outstanding.
• Ackman bought 9.7% of that number (about 29M shares)
• Per his disclosures, his average purchase price was $128 (for a total of $3.7B)
• The (first) Valeant offer was worth, at the time, about $153/share.
• I don't remember what was the share price immediately after the announcement, but I think it was around $160.
• The ultimate Actavis takeover price was about $219/share

So, how much profit did Ackman make, and how much of it was insider-tainted?

• (1) The most comprehensive calculation would look at his overall profit.
  • Overall, his profit turned out to be about $2.6B
    • That would be his gain between his purchase price ($128) and eventual deal price ($219)
    • = 29M * ($219-$128)
  • Arguably, the entire profit is a consequence of his forbidden insider trading, and should all be disgorged; without the insider-trade action, the Valeant takeover bid would have been impossible, Allergan wouldn't have been "in play," and the Acavis deal never developed.
• (2) A less onerous calculation would only focus on his gain during the time he possessed insider-information.
  • That gain is about $930M
    • From his purchase price ($128) to the market price immediately after the announcement ($160)
    • = 29M * ($160-$128)
  • Arguably, any gains he made after the announcement was not on the strength of his insider information and would have been available to anyone else willing to gamble that there will be an eventual deal at a higher valuation.
• (3) An even more generous calculation would only look at the (initial) Valeant offer price.
  • That gain is about $730M
    • From his purchase price ($128) to the (initial) Valeant offer price ($153)
    • = 29M * ($153-$128)
  • The theory here is that his insider information was only with regards to that initial Valeant offer. He had no prior knowledge or assurance that the market will bid the share price even higher or that Valeant (and later Actavis) would choose to bid higher.

If it was me, I would judge that the ill-gotten profit are somewhat higher than the second calculation ($930M), but nowhere near the first ($2.6B). This is because if he had played by the rules, waited until after the announcement, and then bought 9.7%, he would have still made a lot of money; so the ill-gotten gain is just how much MORE he made through the insider trade.

No matter which calculation is used -- even the extra-generous third calculation -- it shows an ill-gotten profit of well more than double the settlement announcement. So, therefore, I concur that the amount is too low.

Judge Carter asked to review this agreement. It is extremely rare for judges to overrule deals made between the litigants (if both sides are satisfied; then the controversy is removed and there is no further cause for judicial intervention; for a judge to rule that the deal is so grossly unfair that it should be over-turned, in effect, makes the judge a stronger advocate for one party than their own attorneys who negotiated the deal!). Ackman and Valeant pointed out that judges always ask to review deals and it's just a formality. They are correct that judges always review deals, and most of the times it's just a formality; but given the numbers, it may be more than a formality this time.

I'll go out on a limb and opine that there is at least an even chance that is one of those rare situations where the judge will not be ok with the settlement (or, that the parties will preemptively change it to increase the amount so as to not risk the judge's ire).

One more point before I finish.
Ackman's Pershing Square (PS) reserved about $75M against this lawsuit; Valeant, to my memory, didn't reserve any. They will be actually paying about $200M and $100M, respectively. Reserving is an accounting and reporting mechanism to assign the anticipated legal losses to the time period when such are first surmised, rather than pretending they don't exist until the judgement (or settlement). Under-reserving, although it may appear like just a paperworks issue, can have severe consequences. For example, investors in PS who bailed out of the fund after the lawsuit was filed, but before the settlement, actually got MORE money back than they should have (since only $75M was being held back). Consequently, I believe, more PS investors bailed than would have otherwise, because they knew they would be getting more as long as they bail before the lawsuit is resolved. Conversely, the depleted count of investors who stuck around with PS (and any new investor) will now be paying the full ($200M) bill on behalf of all the investors who bailed. (I recall, in an earlier post, that I railed against this under-reserving).


Happy New Year, everyone; and my sympathy and wishes for quick career recovery for anyone laid off (and, as always, hit my LinkedIn if you want me to pass your resume)

Dan.

 

Ackman's hedge fund lays off staff, including his driver
https://www.yahoo.com/newsroom/vibes/finance/v-338950e1-cae3-359e-bfa3-af403b69d694_c-f31371e1-c9ad-3bc7-accf-694a58ae58fb_a-f31371e1-c9ad-3bc7-accf-694a58ae58fb

I don't ever take pleasure in reading about a layoff, nor do I find any "cosmic justice" when employees of an organization that was tirelessly working toward an end that would've caused tens of thousands AGN layoffs are, themselves, let go. Most of them, undoubtedly, are hard workers disconnected from strategy matters.

But, still, the irony is too rich to ignore!

Have a great day, everyone!

Dan

 

I can only speculate that PS got a "first time pass." As we all recall, the PS-Valeant maneuver was, by this judge's own writing, uncharted legal territory. The judge never made a determination that it was, indeed, insider trading; just that it is enough of a possibility to be put in front of a jury (which, given the sympathy equation, in the opinion of this thread, would have likely gone against PS-Valeant; but that's just handicapping, not a legal determination). So, the judge is perhaps ok with letting this settlement get by (after all, it would really be extraordinary to overrule a settlement); with the expectation that no one will try this play again (for, if they do, the legal territory will no longer be uncharted, and the transgressor may well have the book thrown at them).

While it presumably isn't a factor, there is also the undeniable fact that Ackman and Valeant suffered a very solid dose of "cosmic justice" subsequent -- maybe even consequent -- to their failed Allergan effort; losing the ill-gotten gains many times over.

Dan.

 

Don't know that the board of directors can do much here. (But they absolutely need to start behaving with urgency).

The immediate issue is the rising number of Botox competitors.

Indirectly, this may be a consequence of letting the R&D guard down. As Pyott clearly realized, and others may have missed, there is no resting in Pharma R&D; you got to keep innovating and creating new products, because the old ones will gather competitors as time passes.

As to whether the Ackman-Valeant attack and subsequent Actavis deal is what caused attention to go elsewhere, that's a reasonable viewpoint; but, to be fair, it lies firmly in the territory of "alternative history" (what would have happened if only...). Maybe Pyott would have retired anyhow and the current times do not produce CEO cut from his cloth. With alternative history, you never really know anything.

Dan.