1. Why does Valeant wish to acquire or merge with Allergan?

Is it possible for Valeant

to create value by acquiring/merging with Allergan?

Answer:

Part 1: Why does Valeant wish to acquire or merge with Allergan?

Valeant is a company which

uses the inorganic model of
growth. Valeant’s CEO Michael
Pearson has been a seasoned
consultant at Mckinsey and is
known as a serial acquirer. In the
first six years of his tenure
as CEO, he acquired more
than 100 companies and
bagged
licensing deals. He sought
companies which displayed
significant synergies and tried to
capture
them.
Allergan has a rich culture of
research and development and
follows the organic model of
growth. Its R&D engine has
generated numerous innovative
products including the invention of
Botox as a cure for wrinkles.
It has grown from a small
eye-care company to a major
pharmaceutical and medical
device company. By acquiring
Allergan, Valeant will have an R&D
engine of its own.
Pearson was known for cutting
costs and introducing extreme
capital discipline in businesses
and believed that by cutting
unnecessary costs in Allergan, he
can increase the value for its
shareholders.
He also wanted to acquire the
specialty pharmaceuticals segment
which consisted of products
which were high-cost, high-
complexity and high-touch which
were not in the product mix of
Valeant.
Valeant is a company which
uses the inorganic model of
growth. Valeant’s CEO Michael
Pearson has been a seasoned
consultant at Mckinsey and is
known as a serial acquirer. In the
first six years of his tenure
as CEO, he acquired more
than 100 companies and
bagged
licensing deals. He sought
companies which displayed
significant synergies and tried to
capture
them.
Allergan has a rich culture of
research and development and
follows the organic model of
growth. Its R&D engine has
generated numerous innovative
products including the invention of
Botox as a cure for wrinkles.
It has grown from a small
eye-care company to a major
pharmaceutical and medical
device company. By acquiring
Allergan, Valeant will have an R&D
engine of its own.
Pearson was known for cutting
costs and introducing extreme
capital discipline in businesses
and believed that by cutting
unnecessary costs in Allergan, he
can increase the value for its
shareholders.
He also wanted to acquire the
specialty pharmaceuticals segment
which consisted of products
which were high-cost, high-
complexity and high-touch which
were not in the product mix of
Valeant.
Valeant
  Valeant is a company which uses the inorganic model of growth.
 Their Valeant’s CEO Michael Pearson has been a seasoned consultant at Mckinsey
and is known as a serial acquirer.
 In the first six years of his tenure as CEO, he acquired more than 100
companies and bagged licensing deals.
 He sought companies which displayed significant synergies and tried to capture them.
Allergan

 Allergan has a rich culture of research and development and follows the organic model
of growth.
 Its R&D engine has generated numerous innovative products including the invention of
Botox as a cure for wrinkles.
 It has grown from a small eye-care company to a major pharmaceutical and medical
device company.
Acquisition Reasons:

 By acquiring Allergan, Valeant will have an R&D engine of its own.

 Pearson was known for cutting costs and introducing extreme capital discipline in
businesses and believed that by cutting unnecessary costs in Allergan, he can increase
the value for its shareholders.
 He also wanted to acquire the specialty pharmaceuticals segment which consisted of
products which were high-cost, high-complexity and high-touch which were not in the
product mix of Valeant.

PART 2: What potential value does Valeant believe it can create with the merger with
Allergan?

 Valeant’s CEO Michael Pearson believed in extreme capital discipline in the

pharmaceutical industry.
 He wanted to capture all the synergies between Valeant and Allergan
o (particularly cost synergies) and focus only on products with the most attractive
margins.
o Valeant was already into wrinkle treatment with Dysport and contact lens
solutions with ReNu whereas Allergan has highly popular products like
Botox, Restasis and Lumigan.
o Hence there were significant synergies with respect to product portfolio and
customer segment
 Also, Valeant wanted to use Allergan as an R&D engine for creating new products.
 The estimated operating synergies between the two companies was $2.7 billion.
 Pearson, core to his beliefs, was going to cut the R&D expenditures of Allergan from
17% down to around 3% which was the case with Valeant.

2. How well did Allergan’s board handle the Valeant offer?

 Answer:

 Firstly Valeant proposed multiple offers to Allergan, each better than the previous one as
the board kept rejecting the same siting unreasonably low valuation through unanimous
vote.
o On 21st April 2014, Valeant made a public offer to Allergan’s leadership team to
merge the two companies.
o Valeant proposed exchanging $48.30 in cash plus 0.83 shares of
Valeant (at$126/share that day) for each share of Allergan, a total value of
$152.88 per share. This was a premium of 31% over Allergan’s stock price of
$116.63 on 10th April.
o On 28th May, Valeant increased the cash component of its offer by $10 per
share, from $48.30 to$58.30 per share. This increased the total offer to $166.16
per share, $58.30 in cash and 0.83 shares of Valeant trading at $126.95 per
share.
o On 29th May, Bill Ackman concluded that if the offer price was raised to an
effective of $180 per share then the offer would receive support
o On 30th May, Valeant increased the offer once more. The cash component was
increased from$58.30 to $72 per share. Valeant’s share price had closed at
$129.22 the previous day, making the effective offer $179.25 per share, plus the
possibility of a contingent value right (CVR) of $25per share.
 Hence Valeant also moved the shareholders directly and was willing to give them a
significant premium for the change of control which was an unethical practice.
 In the interim the Allergan board as a poison pill also approved a shareholder rights plan,
to provide time to evaluate the proposal by valiant.
 Also Allergan’s board showed extreme reluctance to talk to Valeant and is is justified due
to the following reasons:
o Valeant’s growth has been inorganic and driven by price increase
o Allergan believes in development of new products through high expenditure in
R&D. This is in contrast with Valeant’s strategy of cutting and slashing, which
doesn’t hold up for a long time. Also, It was not clear how Valeant would increase
revenues with these cost cuts.
o Valeant’s offer undervalued Allergan as it has a healthy balance-sheet and a
rising operating income (10-15% YOY) over the last few years.
Allergan also forecasted compounded earnings growth of 20%.
o Valeant’s strategy to cut Allergan’s R&D expenditure mainly focused on
increasing cashflows which would in turn be used to pay-off Valeant’s debts.
Allergan could talk to Valeant if they were willing to revise their offer and make a
better offer given the circumstances and the position of Allergan.
o Valeant was getting the better out of this deal.

3. What was the role played by William Ackman and his firm Pershing Square in this?
Can Ackman’s actions be considered insider trading?
 Answer:

PART 1: What was the role played by William Ackman and his firm Pershing Square
in this?
 Pershing Square was an activist fund taking large positions in publicly traded firms
and was led by William Ackman.
 Valeant and Pershing Square entered into a confidentiality agreement to form a joint
venture PS Fund 1, for the purpose of acquiring Allergan Pharmaceuticals where
Pershing Square would provide most of the capital.
 Pershing Square became the single largest shareholder in Allergan and when the
initial proposal for merger was rejected by Allergan it used this position to push for a
special shareholder meeting. They also filed for Schedule 13D , the beneficial
ownership report, indicating the intention of acquisition of Allergan.
 William Ackman was a strong believer in Valeant’s businesses strategy
and was actively engaged in pushing for the merger discussions between Allergan
and Valeant throughout. Hemet with a number of large Allergan stockholders to gain
their support after Allergan initially rejected the merger offer and tried to persuade
them.
 Further to enable Valeant to increase the share price of the offer to $180 to Allergan
shareholders he willingly committed to take just shares and no cash for his firm
Pershing Square. However, Ackman got frustrated when the response from Allergan
was not welcoming and posted letter to Allergan board expressing his dissatisfaction
with the discussions.

PART 2: Can Ackman’s actions be considered insider trading?

 According to the Securities and Exchange Act of 1934:“Illegal insider trading refer
generally to buying or selling a security, in breach of a fiduciary duty or other
relationships of trust and confidence, while in possession of material, non-
public information about the security.
 ”Ackman’s actions were not considered insider trading for the following reasons:
i. Neither Valeant nor Perishing square held a fiduciary relationship with
Allergan.
ii. Valeant was a suitor and Pershing square an investor in Allergan which
means it was Allergan who had a fiduciary responsibility towards its
shareholders including Pershing Square and not the other way around.
 Ackman was not an insider nor was he in possession of any non-public information
about Allergan from Allergan.

4. Which one out of these three options will you recommend to the
management of Allergan: (a) stay single, (b) go with Valeant or (c) go with Actavis ?
 Answer:

 Allergan should finalize a merger with Actavis (Option (C))

i. because staying single was not an option because Valeant got the
support from investor Bill Ackman’s hedge fund Pershing Square
Capital Management
ii. They signed a collaboration agreement under which Pershing Square
bought 9.7% of Allergan’s stock prior to Valeant officially announced their
approach. Pershing Square went on to remove six of Allergan’s nine directors
to drive through the takeover.
 Allergan hence went ahead and sought a lawsuit to bar Valeant, Pershing Square,
and Ackman from voting on the grounds of insider trading and other legal
transgressions.
 Merging with Valeant wouldn’t be sustainable for Allergan’s business as Valeant
was a fundamentally an unsound company, built on a rapid series of acquisitions
with little underlying growth with lowest spend on R&D.
 In the past, Allergan has reaped high reward through their R&D engine with Botox
and they can repeat the same with DARPin.
 Merging with Actavis would be beneficial to Allergan as it would save it from getting
acquired by Valeant and its unlawful tactics.
 Allergan’s option would create long-term growth, anchored by leading, world-class
blockbuster franchises and a premier late-stage pipeline that will accelerate its
commitment to build an exceptional and sustainable portfolio.
 The combined company will have a strong balance sheet, growing product portfolios
and broad commercial reach extending across international markets. The combined
experienced management team would drive strong organic growth while capturing
synergies and maintaining a robust investment in strategically focused R&D.

ial value does Valeant

believe it can create with the
merger with
Allergan?
Valeant’s CEO Michael
Pearson believed in extreme
capital discipline in the
pharmaceutical
industry. He wanted to capture
all the synergies between
Valeant and Allergan
(particularly cost
synergies) and focus only on
products with the most
attractive margins. Valeant was
already
into wrinkle treatment with
Dysport and contact lens
solutions with ReNu whereas
Allergan has
highly popular products like
Botox, Restasis and
Lumigan. Hence there were
significant
synergies with respect to
product portfolio and customer
segment
What potential value does
Valeant believe it can create
with the merger with
Allergan?
Valeant’s CEO Michael
Pearson believed in extreme
capital discipline in the
pharmaceutical
industry. He wanted to capture
all the synergies between
Valeant and Allergan
(particularly cost
synergies) and focus only on
products with the most
attractive margins. Valeant was
already
into wrinkle treatment with
Dysport and contact lens
solutions with ReNu whereas
Allergan has
highly popular products like
Botox, Restasis and
Lumigan. Hence there were
significant
synergies with respect to
product portfolio and customer
segment
What potential value does
Valeant believe it can create
with the merger with
Allergan?
Valeant’s CEO Michael
Pearson believed in extreme
capital discipline in the
pharmaceutical
industry. He wanted to capture
all the synergies between
Valeant and Allergan
(particularly cost
synergies) and focus only on
products with the most
attractive margins. Valeant was
already
into wrinkle treatment with
Dysport and contact lens
solutions with ReNu whereas
Allergan has
highly popular products like
Botox, Restasis and
Lumigan. Hence there were
significant
synergies with respect to
product portfolio and customer
segment
Valeant is a company which
uses the inorganic model of
growth. Valeant’s CEO Michael
Pearson has been a seasoned
consultant at Mckinsey and is
known as a serial acquirer. In the
first six years of his tenure
as CEO, he acquired more
than 100 companies and
bagged
licensing deals. He sought
companies which displayed
significant synergies and tried to
capture
them.
Allergan has a rich culture of
research and development and
follows the organic model of
growth. Its R&D engine has
generated numerous innovative
products including the invention of
Botox as a cure for wrinkles.
It has grown from a small
eye-care company to a major
pharmaceutical and medical
device company. By acquiring
Allergan, Valeant will have an R&D
engine of its own.
Pearson was known for cutting
costs and introducing extreme
capital discipline in businesses
and believed that by cutting
unnecessary costs in Allergan, he
can increase the value for its
shareholders.
He also wanted to acquire the
specialty pharmaceuticals segment
which consisted of products
which were high-cost, high-
complexity and high-touch which
were not in the product mix of
Valeant.