Hey everyone:
I guess we got some development in both AGN and VRX -- nothing that should surprise readers of this thread, but Wall Street, as evidenced by the sharp valuation changes, still seems to be surprised with some regularity.
First AGN:
We had a few acquisitions, some at eye-popping premiums, some criticism, some share price drop, then a big miss on Q3 earnings and an even bigger drop in guidance, more share price drops, and then a shares buyback announcement. So what's my read?
My basic read is that after going some extra miles giving Saunders the benefit of the doubt, this is the 3rd strike in the year-and-a-half he's been at the helm.
The first strike was the Pfizer deal (I still insist, with no value creation other than the tax benefit mirage, what were they thinking???). Demoralized (and lost) some good people, created a lot of distraction, spent a lot of 'benefit-of-the-doubt' good will currency, and got nothing.
The second strike was the spree of over-paid acquisitions. I have no way of telling how much the companies he bought are worth; but some of them were publicly traded -- meaning that some very smart buyers and sellers have established a fair market value for them already. A 20-50% control premium (meaning how much above the market price the buyer is willing to pay the seller to relinquish control of the company) is normal. Once in a rare while, the synergy between the buyer and seller is so compelling that even a 100% premium is conceivable. But 500%? Really? That means that either all the people who were trading that stock beforehand were completely unaware of how valuable their asset is or the buyer (AGN) seriously overpaid. Looked another way: I am usually opposed to hostile take over -- I think the value destroyed during the battle makes for a smaller pie to divide between the participants and stakeholders. However, if the seller's board won't sell for less than a 500% premium, and the buyer honestly thinks the company is worth that much, then the buyer should just make a, say, 200% premium tender offer directly to the shareholders. I can't imagine that they won't get at least half the shareholders to sell at a 200% premium. What could have possibly convinced Saunders that the companies he was buying are worth 5 times what their current buyers and sellers think; and that he can't acquire them for any less than such a price?
The 3rd strike is missing the numbers. Of course. There was no natural disaster, governmental regulation, lawsuit, judgement, or other unanticipated event. Sometimes things don't go well; that's a normal part of life, but the first job of a CEO -- before they may have the luxury of occupying themselves with strategic transactions -- is to know where the numbers are headed before they get there and to guide the market before the fact. Not surprise them afterward. If your numbers are a big miss and you didn't know about it well beforehand (absent an unanticipated externality, such as those listed above), then you are not doing your job.
Often, 3 strike and no scores, for a new CEO, would mean they are out. However, Saunders, here, is not entirely scoreless. He did have one well-executed move: Selling the generic business to Teva, getting a great price, and bringing the deal home even as the overall M&A climate got quite choppy. Readers of this thread know that even though I always considered the deal as likely to close (which it did), I was also worried that Teva would find an excuse to walk away or renegotiate (because the price they agreed to was when the Pharma sector was riding high; they could have played for a re-negotiation to a lower price. The fact that they didn't is to Saunders credit, even if he didn't do anything in particular about this issue).
My feeling: I think Saunders can survive this 3rd strike, but I'm not so sure about the next one (unless he scores again somewhere). I also think his decision to affect a significant share buyback is an acknowledgement of this situation. I am neither a fan nor an opponent of share buybacks. On the one hand, if you use your cash to buy back shares, you are basically admitting that you don't have any good idea how to make investments that generate good returns -- so why are the shareholders paying you the big bucks to be a CEO? On the other hand, if a ton of cash is burning such a hole in your pocket that you start doing stupid things (like pay 500% premium), then it is better, far better, that you just give the cash back to the shareholders to do with as they please. With this buyback, Saunders is, in my opinion, both admitting that he has no good investment ideas and implying that he is no longer inclined to make big acquisitions. That latter implication should put nervous investors at ease that he is not going to continue spending the Teva cash wildly.
To be continued shortly...
