Morgan Stanley's Opinion of Valeant Is Evolving
Has anything good ever happened to an investment bank because of e-mail? I mean, I guess, probably. Certainly e-mail is the best way to tell an analyst to work all weekend without having to watch in person as the light goes out of his young eyes. 1 And it probably helps to, I don't know, coordinate complicated global businesses and so forth. But that's boring background stuff and hardly worth mentioning. Every time you hear about an investment bank's e-mails, it's safe to say, the story is going to be terrible. 2
So here's a terrible story! In April, as you may know, Valeant announced a hostile bid for Allergan. Allergan retained a passel of advisers including Goldman Sachs. Valeant retained a passel of advisers including Barclays and Royal Bank of Canada. Morgan Stanley found itself outside both passels.
This is not allowed. If you are a managing director at a leading investment bank, and there is a big deal in the news in your sector, and you are not a part of it, life loses its savor for you. Your office becomes a place of terror, and your home offers no relief. Sleep becomes a distant memory, food turns to ash in your mouth, colleagues keep side-eyeing you in the hallway. Things are bad. The only way to restore some meaning and dignity to your life is to get involved in the deal.
So Morgan Stanley went and tried to get hired. By whom? Who cares, by whoever would hire them. They worked every angle, and they called in the big guns. Last month Morgan Stanley Vice Chairman and Global Head of M&A Robert Kindler e-mailed Allergan's chief executive officer and chief financial officer to pitch for the defense business, opining that "AGN is not being nearly aggressive enough in going after the VRX business model and currency." And Morgan Stanley's coverage MD, David Horn, followed up with the CFO to clarify exactly what Kindler meant:
Part of what Rob [Kindler] is suggesting [to Allergan] is to allow him to use his significant relationships with media and analysts to provide a clear and detailed articulation of why Valeant is a house of cards and your investors should not want to take their stock.
Meanwhile -- earlier? later? at the same time? -- Morgan Stanley was pitching Valeant to help with its bid. Unfortunately this pitch is not in the public record, but you can imagine its rough outlines. It probably went something like: "We will use our significant relationships with media and analysts to provide a clear and detailed articulation of why Valeant is great and Allergan's investors should want to take its stock."
Valeant bit. 3 Allergan did not. But that's fine: One client per deal is the minimum, but also the maximum. Good job, team.
But what Morgan Stanley didn't count on was the incredibly intense hostility that this deal has engendered. Allergan, for its part, is really committed to its goal of convincing everyone that Valeant is a house of cards. And how better to do that than by quoting Valeant's own advisers saying exactly that?
So it did. Today Allergan issued a press release with the par-for-the-course-by-this-point title "Allergan Reiterates its Belief that Valeant's Business Model is Unsustainable," which starts off with quotes from analysts and short sellers who are skeptical of Valeant, and then, BOOM:
In addition, executives from Morgan Stanley, the investment bank understood to have recently been retained by Valeant, have sent emails directly to Allergan's management team that suggest they share the concerns of Allergan and the above third parties.
And then it quotes those e-mails from Kindler and Horn. With a gorgeous passive-aggressive asterisk, referencing the footnote that's become standard in this deal: "Permission to use quotations was neither sought nor obtained."
So, first: Ha!
But also: What a great move! For one thing, it ... leaves Morgan Stanley in a bit of a pickle, doesn't it? It's not, like, great to lead an offering of securities -- and Valeant's bid is an offer of Valeant stock to Allergan shareholders -- if one of your top bankers is on record saying that the issuer is a "house of cards." From a legal and reputational standpoint, but also, just, how awkward are those meetings going to be? (A modest amount of awkward, is the answer: "While we will have some fun with him later, he’s still very much on our team," said Valeant's CEO of Kindler.)
On the other hand, Morgan Stanley is not alone in the awkwardness. Goldman Sachs, which is now advising Allergan on its defense, underwrote a Valeant stock offering last year. So it's basically in the same boat as Morgan Stanley, just in reverse: A year ago it was vouching for Valeant; now it's helping Allergan "reiterate its belief that Valeant's business model is unsustainable." The lesson is, an M&A banker's opinion on your business model depends on who's paying him.
Another lesson is that Allergan will fight dirty. 4 Quoting private e-mails in a press release is definitely a bit of an etiquette violation, but it's also a good way to deter other banks who might think about joining Valeant's team. I mean, especially if they've also pitched Allergan, and who knows how many have. It's pretty much customary for bankers to pitch both sides of a deal, though this occasionally leads to minor embarrassment. Here Allergan is announcing that it will make the most of that embarrassment.
There are lessons for other companies here, too. For instance: You might as well audition as many banks as possible for any M&A assignment, right? That way, you might be able to conflict/embarrass them out of advising the other side. Plus everything they say to you in the pitch will be supportive of your position -- they're pitching, after all, they've got to flatter you -- so you'll get some good quotes to keep on file. "Look how many people who wanted our money agreed with us," you can say, if you need to.
On the other hand, when actually deciding whom to hire, you might want to check to see if they've said anything that might embarrass you. (They probably have! Sorry. But you might as well know upfront.)
The most important lesson is, if you're an investment bank, maybe ban e-mail? It always works out so poorly. At least, take it easy on e-mailed pitches. Do your pitching via Snapchat.
You should never put your opinions on the record for prospective clients to use however they like. Save your opinions for the clients who are paying you.
Though you can't do that anymore anyway.
Libor being the most notable and comprehensive recent example, but let's not forget Tom Montag's famous, and un-quotable here, characterization of Goldman's Timberwolf CDO deal. And David Viniar's comment that that characterization -- unquotable here but very much quotable in a Senate hearing -- was "very unfortunate to have on e-mail." You're not wrong, Viniar!
Morgan Stanley was brought on because Valeant and the hedge fund manager William A. Ackman, who is working with Valeant on the bid, believed until recently that Allergan might be willing to negotiate a friendly transaction. But with Allergan’s formal rejection of Valeant’s offer this week, it became clear that the effort was headed for a special meeting, where Valeant will seek to replace the Allergan board.
Morgan Stanley has advised on numerous hostile approaches, and has joined the fray late in the game before.
Though good lord imagine if they had sought permission to use quotations. Awkward!
This is obviously a bit tongue in cheek but seriously banks might think about beefing up their e-mail confidentiality procedures after this. Here's Morgan Stanley's form e-mail disclaimer, which is incorporated by link into all e-mails, and which begins in boldface, "This is a confidential communication between sender and its intended recipient." Obviously Allergan did not feel bound by that disclaimer. (Nor should it have.) You could imagine banks e-mailing their clients and prospective clients something like "Hey, just checking in, would you mind writing back saying that you agree not to publicize our e-mails in a press release without our permission?" Seems like a reasonable ask, honestly.
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