This is a situation I didn’t pay much attention to while it was going on but which I think has interesting implications for merger and acquisition activity in the future. It doesn’t seem to me, however, that investors in general understand exactly what went on.
The bare bones: Bill Ackman, of Pershing Square fame (and J C Penney infamy) bought just under 10% of Allergan, the maker of botox, and urged the company to put itself up for sale. Ackman then allied himself with serial pharma acquirer Valeant to make a joint hostile (meaning against the wishes of the target) bid for Allergan. Actavis, a third pharma company, emerged as a “white knight” to rescue Allergan from Valeant’s clutches with a bid that topped Valeant’s offer by about 15%. Valeant conceded defeat.
This is the latest enactment of one of the oldest dramas on Wall Street. A “black knight” makes a hostile bid for a vulnerable company. The target firm, realizing that it is now in play, understands that at the end of the day it will most likely be acquired. The only choice that remains to the target is to choose who the acquirer will be. Invariably, it determines to join with anyone but the black knight that has caused all this trouble. That’s why hostile bids fail as often as not.
For this reason, one of the bigger problems in the m&a game is that no one really wants to be the black knight. Once the villain has appeared, however, there’s usually no trouble in finding someone willing to ride to the rescue. In most cases there’s at least one potential acquirer hoping against hope that someone else will make the first move.
The Ackman innovation: in February, when he and Valeant became co-bidders for Allergan, he agreed to pay Valeant 15% of his Allergan profits if a third-party ended up acquiring Allergan. This created a win-win situation for Valeant, which would either come away with Allergan or with several hundred million dollars for having played the black knight role.
Issues:
–what was the Allergan price at which Valeant shifted from hoping to acquire the company to wanting to collect a fee from Ackman?;
— did Valeant ever really expect to own Allergan?;
–most important, will this maneuver work again?
I don’t know …but the answer to question #3 depends a lot, I think, on the answer to #2.