Glossary of Hostile Takeover Terms with Discussion

Hey everyone:

Another milestone in the slow-motion collapse of VRX: Today, for the first time (since we got interested, at least), VRX dropped into single digits territory -- closing at $9.50. Down about 15% this week alone (and the week is still young). The media is giving different stories as to the reason: That they are not getting the prices they were hoping for when auctioning off their assets, that the new CEO (Papa) is getting a very generous compensation package, and that Michael Pearson is suing Valeant for not honoring his exit package.

With regards to the first: You could've read about this here 2 years ago. The business is simply not worth as much as they paid for it (with borrowed money); and finding out that no one else would pay so much shouldn't be a surprise. If you outbid everyone else to acquire an asset, then strip it down and run it to the ground, don't expect others to pay even more to take it off your hands.

As for the second: I'm no fan of Papa, not by a long stretch, but lets be real, once Pearson was pushed out, getting any CEO with realistic credentials to try and salvage the situation was going to require more than just "we all need to make sacrifices" type of compensation package. And, besides, his big numbers are all just in the event he somehow takes the stock back to the stratosphere -- ain't gonna happen, but if it does, he would surely deserve the big payday. For now, he was forced to invest $5M of his own money as an employment condition, and his $1M annual salary doesn't even begin to cover how much he's already lost of that $5M.

And as for the Pearson lawsuit, it reminds me of an old dark humor Joke:
Q: What is the definition of Chutzpah?
A: A man convicted of murdering his parents pleads the sentencing judge for mercy because he is an orphan.

Hope everyone is doing well!

Dan

 

Thanks.

I didn't read the whole article, but I think I got the gist.

I am in total agreement with the author (and SEC) that these non-GAAP measure, and particularly "cash EPS", are more deceptive than informative. I also share his wariness of managements that seem to ask investors to pay no mind to GAAP earnings, and instead focus on cash EPS. As to his calculation of the corresponding stock price, as everyone here already knows, I don't do that. He isn't saying anything that the market doesn't already know, and the market is currently pricing the stock as it does (rightly or wrongly).

In non-accountant-speak: There is a well established methodology, developed over the past 500 years, of figuring out how much profit a company is making (and other financial reports). It is summarized as "Generally Accepted Accounting Principals" (GAAP). GAAP carefully takes account of expenses and revenues even when they do not have immediate cash impact. For example, if a company spends $X on developing a drug (or a software, or buy a machine, or a building; or, really, anything that will be used in the future); under GAAP, the profits made by the drug each year is reduced by some portion of $X to account for the fact that developing the drug wasn't free. Companies are required to report their financial statements in compliance with GAAP; but there is nothing that prevents them from adding non-GAAP metrics that they feel will be relevant to their investors -- so long as those metrics are defined, truthfully reported, and not deceptive. "Cash EPS" is one such popular non-GAAP metric (so popular, that sometimes the terms "non-GAAP" and "Cash EPS" are used interchangeably). It is intended as a counterpart to GAAP EPS (Earning Per Share -- Total profits divided by total number of shares). Because it is not part of GAAP, there is no definitive definition; and companies sometimes have different computations -- and they sometimes change the computation from year to year. The basic thesis of "Cash EPS" is the removal of all expense items that did not involve cash expenditure during the reporting period (this is a close concept to EBITDA -- Earning Before Interest, Taxes, Depreciation, and Amortization -- but there are some differences). Because a lot of "non-cash" expenses are taken out, it makes the profit seem (a lot) larger. It also creates an image of the company as a machine that just creates money at a furious and sustained rate.

But, it isn't sustainable. Drugs, or software, or machines, or buildings, (etc.) will need to be maintained, upgraded, serviced, and eventually replaced. They are not immortal revenue machines. The GAAP rules capture this mortality very methodically. Dispensing with those rules may look great, temporarily; but misses the bigger picture.

So, bottom line: Pay attention to the GAAP numbers, and have healthy skepticism of all non-GAAP -- especially "cash EPS" -- metrics.

Dan.

 

Oh, that's easy. It's all about Teva.

Remember, when the Teva deal was working it's way, I was concerned that Teva overpaid and they would bail before closing. Well, they didn't bail (they should have, but lucky for us they didn't) and, indeed, overpaid. So what happened? The super-optimistic projections that were needed for Teva to justify the lofty price they paid us for the generic portfolio, surprise, surprise, didn't pan out. So Teva missed their numbers, big time. They dropped over 30% this week.

So why is this a problem for us?
While we got most of the $40B for the generic portfolio we sold to Teva in cash, some of it (my memory says about 10%, but I'm too lazy to go check) came in Teva stocks. Those stocks are worth a lot less this week than last week. (We promised not to sell those stock for something like one year, and we are still just within this restricted period; bummer). That drop alone reduce our market cap by a good chunk. Additionally, the big Teva miss is weighing on all drug makers, particularly those with big generic portfolios, because it is showing that its getting harder to make good profits in generics.

But, hey, look at the bright side: We got a lot more for the generic portfolio we sold to Teva than we now know it was worth. Even if the portion we got in Teva stocks is taking a beating, we took most of the cash off the table before the beating started. So, really, we are still way ahead of where we would have been without this deal.

Dan.