DeVito, in Other People's Money, would represent the Valeant-Ackman team -- who believe that the target company is worth more liquidated than alive.
Stock buyback, by itself, doesn't give much defense. It has to be in combination with something else. Valeant is offering Allergan's shareholders all the cash it is able to borrow (entirely on the basis of Allergan's borrowing capacity; they have no remaining borrowing capacity on their own), plus about 40% of Valeant's shares. Every dollar Allergan borrows to buy shares back reduces the amount of cash available for Valeant to borrow, but it also reduces the number of shares Valeant need to buy. As long as the price Allergan is buying its shares at is not far from the value of the Valeant offer, the effect is neutral -- Valeant will have to modify the cash and equity components, more equity and less cash, but the total offer would remain about the same. In affect, the Allergan board would be transforming equity into debt exactly as Valeant would have without sabotaging the Valeant offer in any meaningful way. The shareholders who want cash more than Valeant equity would take the (buyback) cash, and those who do want Valeant equity would stick around for the takeover (and get more Valeant shares each).
A buyback in combination of other activities that will move the share price up (such as cost cutbacks, selling assets, accretive acquisitions), will sabotage the Valeant offer, because it will move the trading value of Allergan above the Valeant offer value. Valeant will then be forced to walk away or increase the share component of their offer (above the current ~40% of the combined company), this will likely reduce the trading value of Valeant (since current Valeant shareholders will be diluted down further), reducing the value of the offer back again. At a sufficiently high Allergan share price, it becomes effectively impossible for Valeant to win even if they hand the entire company over to Allergan shareholders.
Dan.
