Not a smiling picture, but you don't get a lot of photos of Bill Ackman in sunglasses.

Allergan Deal Leaves a Smile on Everyone's Face

Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.
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There are still a few weird sideshows left to play out, but it seems reasonable to say that the drama of Allergan and Valeant and Pershing Square and Actavis is over. Actavis agreed to buy Allergan for a headline number of $219 a share in cash and stock, ending the drama that started with Valeant's April 21 offer to buy Allergan with Pershing Square's help. A quick scorecard:

Everybody wins! Certainly all the public company shareholders win. But Pershing Square and Valeant also had a toehold in Allergan's stock. A further (approximate) scorecard:

Really everybody wins! Pershing Square is up almost $2 billion, and Valeant has made almost $400 million.

One way to think about Valeant's proposed acquisition of Allergan, back in April, was that Valeant wanted to buy Allergan and was paying Pershing Square a few hundred million dollars for its assistance. It seems now though that a better way to think about it is that Pershing Square wanted Allergan sold, and paid Valeant a few hundred million dollars for its assistance. Valeant served as an excellent stalking horse: It was a credible acquirer (big, acquisitive), and yet also a terror for Allergan's board and management, who at least claimed to believe that Valeant was a semi-fraudulent strip-miner of pharmaceutical companies that would ruin all that was good about Botox. That threat focused their minds, and that focus led to a deal -- and a 50+ percent profit for Pershing Square in less than a year.

Valeant has forthrightly conceded defeat -- "Valeant cannot justify to its own shareholders paying a price of $219 or more per share for Allergan" -- but it is a fairly pleasant defeat. Its own stock is up, both on the day and since it announced its takeover intentions back in April, suggesting that Allergan's rather vicious attacks on Valeant's business model have not really stung. And that $400 million in profits is not nothing; it's more, for instance, than Valeant's entire net income so far this year. I am no expert on the pharmaceutical business, but I am a connoisseur of laziness, and acquiring pharmaceutical companies, stripping their research budgets and squeezing profits out of them sure sounds like hard work. Getting paid $400 million for threatening to do that, without having to actually do it, sounds far preferable.

If you combine Pershing Square's and Valeant's roles here, you get something that looks like an old-fashioned corporate raider, someone who takes a stake in a company and then offers to buy the whole thing, with an implied threat of doing mean stuff to the business and even meaner stuff to management. Management, fearing the raider, runs into the arms of a white knight, and the raider gets paid off by selling into the white knight's deal. The '80s are back!

But now there's a division of labor, in which both Pershing Square and Valeant can play to their strengths. Valeant doesn't need to lay out much cash for the toehold, or take much downside risk, or do a lot of the hard work of proxy fighting; it can leave that to Pershing Square and just act like a regular, though hostile, strategic acquirer. And Pershing Square gets to be an "activist investor," a big Allergan shareholder that just wants the company to maximize value, rather than a hostile "raider" itself. It has fewer conflicts of interest with other shareholders than a typical raider has: A raider wants to buy cheap, but a shareholder wants to sell dear. Carl Icahn would probably play both roles himself, but this approach has some advantages too.

Also some disadvantages. One of the sideshows still left to play out is Allergan's insider-trading lawsuit against Pershing Square and Valeant, which is a plausible lawsuit only because Pershing Square and Valeant teamed up together rather than one of them going it alone. The thrust of that lawsuit is that Valeant and Pershing Square took advantage of ignorant public shareholders of Allergan, buying from them at depressed prices before announcing the takeover offer. But if you look at those scorecards, that position becomes hard to take seriously. Allergan's shareholders are up some $20 billion, due largely to Pershing Square's and Valeant's efforts. Pershing Square and Valeant are taking home a little under 12 percent of the value they created, $2.3 billion or so.

By contrast, Actavis is rumored to be getting a $2 billion breakup fee for agreeing to buy Allergan: If someone else tops its bid, Allergan will pay it $2 billion for serving as a stalking horse and getting the auction going. But Actavis didn't serve as a stalking horse, and didn't get the auction going. Valeant and Pershing Square did, so their $2 billion and change of profit seems only fair. This is corporate raiding that makes everyone happy, and surely that's worth paying for.

  1. The deal is $129.22 of cash and 0.3683 Actavis shares per share of Allergan; that $219 is based on Friday's close. Now it's more like $220 or so.

  2. All prices are as of around noon today.

  3. My understanding is that Valeant owns $75.9 million worth of stock -- the limit for antitrust law -- at a price based on the average price at which Pershing Square accumulated the first 4 percent of Allergan stock that it bought. I guesstimated that average price based on the average price of the first 12.7 million shares. (See footnotes 1 and 3 here.) Three dividends of five cents a share have been declared during their ownership; the latest has an ex date of tomorrow and is payable in December. There was also a dividend with an ex date of Feb. 26, and Pershing Square bought a few shares before that, but I ignore those. In addition, Valeant and Pershing Square have a deal where Pershing Square gives Valeant 15 percent of its take on the deal.

    That scorecard uses Allergan's current trading price; if you use the implied deal price you get higher numbers:

    [imgviz image_id:iUJEBy6yv4pg type:image]

    On the other hand, I'm ignoring their deal costs here, which I suspect are substantial.

  4. I mean, through Sept. 30. Also "net income" appears to be a not very useful category for Valeant, which as Allergan will cheerfully tell you is an odd accounting beast; Valeant is fond of operating cash flow, which is higher.

  5. Another one is that Pershing Square is apparently not dropping its proxy fight with Allergan. I don't ... I don't really know why Pershing Square would want to get its board nominees elected, just to sell to Actavis? (Surely they wouldn't squash a sale.) Just spite? Or "as a negotiating wedge to have the insider trading lawsuit dropped"?

    Another sideshow I guess is Zoetis.

  6. I mean, the real thrust of the lawsuit is about Rule 14e-3 and "co-bidders" and "substantial steps" toward a tender offer, but the, like, moral import of it is whether they took advantage of innocent shareholders. We've discussed the lawsuit here and here. While a judge allowed Pershing Square to vote its shares at Allergan's shareholder meeting, he also found some likelihood that Pershing Square and Valeant would ultimately be liable for monetary damages to Allergan shareholders.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Matthew S Levine at mlevine51@bloomberg.net

To contact the editor on this story:
Zara Kessler at zkessler@bloomberg.net