Re: The Beginning of the Endgame
Some important news yesterday, but first a quick reminder to some of the key points and predictions in my post a week ago.
3 - The Actavis cash offer: While everyone is focused on the Salix deal, this, I think, is the biggest story of the week. Not necessarily because it is more likely to happen than Salix (right now, I'd lean in favor of Salix more likely to happen than Actavis), but because this one is the biggest death knell to the Valeant offer.
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HIGHLY SPECULATIVE THOUGHTS:
At this point, halfway through the week, Valeant is looking pretty bad. While everyone was assuming that the Allergan Board has spent 5 months looking for an alternative strategy and failing, just as Ackman said all along would happen, and will now be dragged into the Special shareholder meeting with nothing better to say than "trust us, continuing to do what we have been doing is better than accepting the Valeant offer," apparently those 5 months were anything but fruitless. Allergan has created not one, but TWO, viable alternatives to the Valeant deal. In addition, it has shaken the Pharma eco-system so hard that there are a half-dozen connected deal and proposed deals in play at the same time that are all directly associated with Allergan or it's potential partners. And while all this wheeling and dealing was going on, Valeant was left out in the cold, entirely un-clued as to what was transpiring, just pushing their one-trick-pony proposal (and not even doing a good job pushing it). Quite the irony that the biggest dealmaker in all of Pharma was left sitting out the biggest deal making year of recent decades. The market was also indicating a decreased faith in the Valeant deal by pushing the Allergan share price above the value of the (current) Valeant offer for the first time since it was made. The Valeant battle plan, all focused around winning the December 18 special shareholder meeting at Allergan, included the carefully staged releases of real and manufactured good news in the run-up to that meeting so as to drive up Valeant's share price (and thus the perceived value of the offer) and the general mood of it's inevitable win. However, with the very realistic possibility that the game would be over, and Valeant left out, long before December 18; and possibly within days, all stored ammunition was immediately fired. For the rest of the week, any piece of news that could possibly drive up Valeant share price -- even if blatantly deceptive -- was desperately put out.
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What to expect next week (entirely guesswork):
Even more fireworks. Valeant will continue firing every real and fabricated piece of good news ammunition they have been saving up (but I think their magazine is going to run out very quickly, and I think the gullible shareholders are already maxed out). Allergan will probably issue an official response to the shareholder letters (there may be a few more of them before we are out of this phase). Two really big pieces of news that may just come out this week would be a Salix announcement and an increased Valeant offer. One REALLY interesting story that just might come out would be the possibility of a 3-way deal involving Actavis, Allergan, and Salix. I don't know if it's feasible, but it sure would be interesting if it were contemplated.
Dan.
There are two key news items, both as anticipated here: The Actavis White Knight option has returned with a bang, with an "according to persons familiar with the matter" saying a friendly offer above $200 is imminent, and Valeant (with visible difficulty) saying they will raise their offer by $15, but aren't quite yet sure how they'll do it (never mind that it is still well south of $200).
(OK, I'm gloating, I admit, but when the entire media was writing for the past 2 weeks about how Valeant has all but won, while I was writing about the death knell of their deal and the mechanics of it's upcoming unraveling, I think I earned some gloating rights with yesterday's news being such a match to my writings!)
If Allergan trading above the Valeant offer value is an indication of the market losing interest and faith in Valeant (and merely treating it as a floor -- something to fall back on if superior alternatives fail, rather than a premium), then the past 2 weeks and today have been quite telling. For much of these 2 weeks, Allergan has been trading $1-2 above the offer value, extending to about $4-5 toward the end of the period and jumping to ~$10 after the Actavis leak and at market close Tuesday. (To be fair, the Valeant announcement came after the market closed, so it's not factored into the price. We will see Wednesday morning how the market is taking it).
Valeant is now using the last of it's ammunition. If the battle is going to be over in the next few weeks, saving any won't do it any good. They can't offer more than a trifling additional cash, because their borrowing power is tapped out. They can offer a bit more equity, but, as explored in great length in my earlier posts, offering more equity dilutes their existing shareholders, pushing their share price down, and reducing the value of their package back down. Actavis, on the other hand, is just getting started (they may be close to tapping out of cash, but they haven't even started offering equity), values Allergan as a source of valuable research pipeline (not just costs to strip away), and has the advantages of a friendly offer. I can't, for the life of me, see how Valeant can hope to outbid Actavis.
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Anyone who was wondering if the final phases of this battle will provide a grand finale worthy of the most intensely fought hostile takeover battle in recent decades, will not be disappointed. On top of all the other factors already mentioned before, we are now also having the opening shots of a true bidding war.
In this grand finale, expect that law suit threats and governance issues complaints will come flying out with great frequency, and many will be citing obscure (to non-M&A people) legal standards. I thought I'd spend some time preparing the readers with regards to the legal standards board of directors are required to follow.
There are 4 distinct mode, each with it's own legal standard, that define the requirements and flexibility a board has. In all 4 modes the board is required, and presumed unless otherwise demonstrated, to act in the fiduciary interest of all shareholders, to be faithful and honest in the execution of its duties, to have effective oversight over management, and to assure itself that it is well informed. The 4 modes are:
1.
Business Judgement Rule: This is the basic standard for all board activities, including basic actions taken during a hostile takeover defense, unless a higher standard in in place. It basically says that as long as the board is operating within the laws and bylaws and is following a reasonable process to keep itself informed, it's business judgments are beyond reproach, not to be second guessed by a plaintiff or a judge.
2.
The Unocoal standard: This is the standard for evaluating aggressive hostile takeover defenses. When a company receives an offer, it's first duty is to evaluate if it is in the interest of the shareholders (Boards have the freedom to disregard normal solicitations for business dealings, just like individuals have the right to hang up on telemarketers; the one big exception is merger and acquisition offers. The Board is
required to listen carefully and evaluate fully!). If the Board evaluates the offer to not be in the best interest of the shareholders, the board has a duty to
defend the corporate bastion. This duty holds even if most shareholders think the offer should be accepted. If the offer is hostile, and there is a serious risk that a majority of the shareholders will accept it, the board may even take value-destroying defensive actions (such as overpaying for an acquisition or cutting back on good R&D), if it judges those actions to be less harmful to the shareholders than accepting the hostile offer.
The Board is legally required -- even in the face of a barrage of blistering opposition from its shareholders -- to take whatever actions it deems necessary to thwart a hostile takeover effort that it finds to be against the interests of those same shareholders. But herein lies a great governance risk: A board that is judging a hostile takeover offer to be against the interest of the shareholders would appear to be empowered to take any actions it wants, even value-destroying actions, to keep itself in power. The Unocoal Standard, so name after a 1980's lawsuit involving Unocoal (defender Unocoal won the lawsuit and the takeover battle), allows such aggressive hostile takeover defenses, but must be held to a standard of reasonableness and proportionality to the level of threat. Under the Unocoal standard, the Board may take into account the interests of non-shareholder constituencies, such as bondholders, employees, customers, communities, etc, whose continued allegiance would be needed if the company were to remain independent.
3.
The Revlon standard (aka auctioneer mode): Once the board has decided that the best, or inevitable, course of action for the company is a merger or sale, the Unocoal standard goes out and the Revlon standard kicks in. The Board becomes an auctioneer -- an agent of the seller (the shareholders) -- whose job is to get the best price for the company. In this mode, the interests of other constituencies are no longer relevant; only the shareholders matter. If multiple bidders are making credible cash offers, the board may not accept any offer other than the highest one. Of course, even in auctioneer mode, the Board may still decide that the highest bid is inadequate and that staying independent is the best interests of the shareholders (even if the shareholders think otherwise). Unless the bid includes equity (or other obligations) in the acquirer, it is none of the Board's business what the buyer intends to do with the company; just how much they can get for it. If bidder A's best and final offer includes keeping all employees, and bidder B is offering $1 more and plans to fire most employees; the auctioneer is forbidden from accepting bidder A -- it can either take bidder B or provide evidence that it is better off staying independent (of course, in such a close-call scenario, the employees may choose to ally with bidder A and throw in $1.01 to help him top out). Bidders who offer non-cash considerations (such as Valeant offering shares) give the board flexibility to value those considerations using their best judgement. While Wall Street considers the trading value of a stock to be the best metric of it's value, Boards are under no compulsions to do likewise. If the Board thinks Valeant's share are overvalued, or their merger business plan will destroy value, they are completely free to value the offered shares accordingly. The Revlon standard, you guessed it, is named after another 1980s case involving Revlon (defender Revlon lost the lawsuit and the takeover battle).
4.
Entire Fairness Standard: (Not relevant here, but will be relevant if a management buyout ever comes into play) When enough board members or shareholders are on both sides of a transaction (or otherwise stand to benefit from it personally), a very high standard of fairness to everyone else kicks in. Basically, the interest of those not on both side of the transaction must be fully protected.
-- Well, so much for today. I fully expect, over the coming days and weeks, to be referencing these concepts, as the situation develops.
Dan.
