If the company is doing well, management is in control; if not, the investors are
I promised myself I'd write something about why I believe this merger won't happen.
Aside from all the tactics, gamesmanship, financial and legal maneuvers, and the agendas of the many constituencies in the mix -- I believe it comes down to a fundamental rule of business (and perhaps of organizations in general).
This rule applies to a teenage boy borrowing money from his parents to buy a bicycle for a paper route, a team of entrepreneurs raising funds from Angel investors and Venture Capitalists, privately held companies, publicly traded ones, government-owned companies, multinationals, and even non-profit organizations; and it applies regardless of who owns what percent of the business or the capitalization structure or the debt or the bylaws or the covenants or the governance -- If the company is doing well, management is in control; if not, the investors are.
In the realm of hostile takeovers, over the past 30 years, I watched, with varying degrees of attention, perhaps 100 hostile takeover battles. Not once did I see this rule violated. Successful hostile takeovers have always been against companies that were under-performing. Either the company was under-performing it's industry, or the industry was under-performing other sectors. When companies are over-performers, they have options that will create more value than the takeover; under-performers often do not. When there are options that will create more value, there are constituencies available to finance such options in exchange for a portion of the incremental gain. When there are counter-constituencies with a superior value proposition, hostile takeovers fail.
Maybe Valeant is doing well (as a pharma company), as they claim; or maybe their stock price is entirely the product of financial engineering, as Allergan and much of the media claim; but they are certainly not doing better than Allergan. While my other posts (and much of the media and analysts community) speculated on which options Allergan will take when they finally make their Hard Power move -- acquisition, share buyback, special dividend, management buyout, or likewise; the bottom line is that Allergan has options; and Valeant hasn't shown any value creation that will come out of the merger.
(Even if one were to accept Valeant's view that R&D is wasteful and Allergan would be better off without it; it is still not an argument as to why Allergan shareholders would be better off handing Valeant shareholders 56% of the gains from restructuring Allergan's R&D level).
Dan
PS: Allow me to thanks those who posted in response to my last comment. In our household, we are always optimistic!
