You can understand why Valeant and Bill Ackman have given up on their dream of having an imaginary Allergan shareholder meeting, but it still makes me a bit sad. When they announced their Allergan referendum last month, I had visions of this being the next new thing in corporate governance: Dissident shareholders holding unauthorized meetings in seedy taverns, armed with nothing but a deep sense of grievance and some handwritten proxy statements, plotting fantastic insurrections against oppressive corporate regimes.
But I guess it didn't work? Valeant and Ackman conceived of the referendum -- to vote on a softball resolution asking Allergan's directors to open merger negotiations with Valeant -- as a way, one, to talk to other Allergan shareholders without running afoul of Allergan's poison pill, and, two, to get the public-relations victory of a bunch of Allergan shareholders publicly taking their side.
On point one, "Mr. Ackman said Monday that Pershing Square now decided to forego the referendum because of concerns from Allergan shareholders that such a vote could trigger Allergan's so-called poison pill and would delay a special meeting." Since nobody quite knows if the referendum would actually trigger Allergan's pill, and since triggering the pill is a disaster, it's hard to get shareholders comfortable with it. But if it didn't work here, it seems unlikely that anyone else will try it again. Which means that my dream of seeing a million fake shareholder meetings bloom might be dead.
On point two, I don't know, you do the math. Valeant and Pershing have moved to demanding a real special meeting of shareholders, where they'd run a proxy fight to throw out six of Allergan's nine directors and try to elect their own, pro-merger slate.1 The meeting couldn't happen before August, and to get it they'll need to solicit consents from holders of 25 percent of Allergan's shares. Their bidder vehicle owns about 9.7 percent already. So they can get an interim victory -- winning the right to hold a special meeting -- by convincing only another 15 percent or so of the shares to vote with them. That is a lower bar than getting a majority of shareholders to support them at the fake meeting. Of course just forcing Allergan to call a special meeting won't get their merger done, but then, neither would winning their nonbinding referendum. The point is just to win a victory or two to get momentum.
Because right now this is not a deal that is particularly characterized by momentum? Here's a good DealBook chronicle of how strange the last week or so has been at Valeant and Pershing Square. Today's pivot from holding a fake shareholder meeting to demanding a real one is ... surprising, I guess, but it is also replacing a very strange tactic with a pretty normal one, so you can't be too surprised.
Weirder, though, is last week's panicked-seeming spasm of negotiating against themselves, when Valeant offered $58.30 in cash (and 0.83 Valeant shares)2 per Allergan share on Wednesday, and then, without waiting for a response from Allergan, offered $72.00 in cash (and the same 0.83 Valeant shares) per share on Friday. This, you would have to say, mostly worked; Allergan's stock closed up almost $9 on Friday, and based on Valeant's $134.17 close today represents merger consideration of $183.86 per share, above the popular rough target of $180.3
To get there, Pershing Square agreed to give up $600 million in merger consideration, taking just 1.22659 Valeant shares (and no cash) for its own Allergan shares.4 This also feels, in a way, like a return to normalcy. Pershing Square is in a weird position as both a buyer of Allergan (as Valeant's co-bidder), and as a seller (as Allergan's largest shareholder). The large majority of its investment in this deal came up front, in accumulating the toehold; after doing that buying, it's been more in the position of a (motivated) seller than a buyer. As far as Pershing was concerned, the more Valeant pays the better off it was.5
This was a bit weird. I mean, it's a common enough conflict in management buyouts, and sometimes resolved in similar ways; Michael Dell, like Ackman, gave up value on his shares to get the Dell buyout done. But that problem was unavoidable; Dell had owned those shares for a long time. It was a little strange for Valeant and Pershing, neither of which owned any Allergan shares when they got together, to start a protracted takeover battle this way. They were setting themselves up for a situation in which every price increase would be painful for Valeant, and pleasurable for Pershing.
Now Pershing Square is getting value of around $165 per share, or right around where Allergan traded after Pershing and Valeant first announced their takeover effort. The subsequent negotiations, and the run-up in Allergan's price, will cost Valeant, but they won't benefit Pershing Square. Pershing's, as it were, brokerage fee for using its capital to make this deal work will be more or less fixed.6
Why not do it this way from the beginning? I don't know. Obviously Pershing Square took the bigger economic downside risk in accumulating the $4 billion toehold with its own money, so it makes a lot of sense for Ackman to also want to get the upside, even if it came at Valeant's expense. But another factor to consider is just that nobody has ever quite done this before: The playbook for a corporate buyer teaming up with an activist hedge fund to buy a competitor is being written on the fly. Nobody is quite sure what they're doing in this deal. Sometimes it shows.
1 Actually as I read it they're voting to throw out the old directors but can't actually vote to elect new ones -- they're just voting "to request that the Board elect or appoint the following individuals to serve as directors on the Board" and hoping that the board does as requested? Anyway, here's a Dealpolitik discussion of Valeant's charter provisions that you might find relevant.
2 And a weird contingent value right that we're just going to leave to one side for now.
3 Ackman's target anyway:
Mr. Ackman said he made his decision to take a price cut, helping Valeant to boost its offer, after meeting other top Allergan shareholders on Thursday. Mr. Ackman said they told him they wanted a bid of $180 a share. Friday's offer would deliver Allergan shareholders, outside of Pershing Square, $179.25 a share in cash and stock.
4 Incidentally, here's a little math:
This is a little approximate -- I'm doing some guesswork on the split between Ackman and Valeant shares -- but you get the idea. I see Pershing giving up only about $532 million of value, not $600 million, because I'm using today's Valeant close: Ackman's 1.22659 shares are more valuable, relative to the cash-stock deal that everyone else is getting, than they were on Friday morning when he struck the deal with Valeant, because Valeant's stock is up almost $5 since then.
This also ignores Pershing's commitment to buy additional Valeant shares at the closing of the merger, which seems to have been designed to make Pershing and Valeant look better as co-bidders.
5 This is a bit loose, since it will be taking Valeant shares, so egregious overpayment presents a business risk. But the more of New Valeant that goes to Old Allergan shareholders, the better off Pershing Square -- as an Old Allergan shareholder -- is.
6 At least as a number of Valeant shares. Obviously Pershing and Valeant are aligned in wanting those shares to be worth more. But anyway as of now that brokerage fee looks like $900+ million, so, nice work.
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