Allergan Fights Takeover Bid—and Everyone Wins
News from the world of mergers and acquisitions can be as sensational as the goings-on in a TV soap opera. That was certainly the case when a Canadian company tried to buy the American company Allergan, which is best known for its anti-wrinkle product Botox. In the pharmaceutical industry, it is common for companies to grow by acquiring other companies. Research and development (R&D) in the drug industry is expensive, and many companies go bankrupt or simply fold up before their idea is developed into a viable product. Sometimes big companies buy the assets or the stock of these smaller firms, saving the risk and cost of R&D. Botox is made from botulism bacteria, a dangerous poison. The company adds a lot of water to create a dilute solution, which paralyzes the muscles that hold wrinkles tight; the muscles release the skin so it is smoother. The product has other uses and Allergan has other products (Botox represents about one-third of sales). Allergan also makes medical products as diverse as acne medication and breast implants. Valeant is a Québec-based pharmaceutical that had been trying to take over Allergan for some time. Valeant joined forces with Pershing Square Capital Management, an American company, to buy stock in Allergan, with Pershing buying up almost 10 percent of the stock. Allergan’s management became concerned about the cost-saving measures that Valeant was planning for its R&D budget and fought the takeover in the courts and with every method available. The board of directors of every company has a responsibility to its shareholders to maximize the value of their shares and to protect the long-term viability of the company. Pershing took Allergan to court because it felt that the value of its shares was being diminished by an anti-takeover provision that Allergan had introduced. This was just one step that Pershing took to support the Valeant hostile takeover offer. The takeover deal had sounded like a good one for the Allergan shareholders. The total value of all the shares of the company was just over $30 billion when Valeant offered more than $54 billion for the shares. The share price of Allergan and Valeant trended up directly after the announcement, but the Valeant share price dropped as Allergan’s opposition to the deal became known. Rumours of insider trading and investigations in both the United States and Canada also resulted in negative publicity. To block the hostile takeover, in November 2014, Allergan agreed to be sold to Actavis, a generic pharmaceutical manufacturer from Ireland. Actavis would still cut the R&D budget at Allergan but not nearly as deeply as Valeant had planned. Allergan’s management said the deal would create a better fit. The Actavis deal was worth $66 billion, so all the stockholders of Allergan made more than they would have from the Valeant proposal. This even includes Valeant, which had bought stock before starting the takeover process, and Valeant’s partner in the deal, Pershing. Pershing made more than $2 billion profit from the failed bid to buy Allergan; Valeant made nearly $500 million. So, like the characters in most soap operas, everyone in this saga ended up getting rich.
Thinking Critically
1. Why would the managers and board members at Allergan not want to sell for a price so much higher than the market price? Why would they seek out an alternative merger partner?
2. Look up the companies involved in this story on the Internet. How have their share prices moved since the events of 2014? Has Valeant bought any other companies?
3. How would a small business owner go about buying a competitor or any other company? What would the procedures be? Is a hostile takeover possible when dealing with a sole proprietorship? What about a partnership of three equal owners?