Ackman, Actavis, Allergan and Valeant

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.

 

Pershing Square has sold its entire stake in J C Penney (JCP) overnight

Pershing no longer owns any JCP

Bill Ackman has followed up his departure from the board of JCP by describing his investment in that company as a “failure” and striking a deal with Citigroup (C) to sell his entire 38.08 million share holding (about 18% of the outstanding stock).

Ackman’s investment group will receive $12.90 a share, less fees.  My guess is that they’ll net about $12.25.  We’ll know for sure when the final prospectus comes out.

Contrary to earlier press reports, which said C was going to take this massive position onto its own trading books and gradually dribble the stock out to the market (which would have entailed a huge risk) this is a straightforward underwriting.  The only twist is that there’s no big underwriting/sales group.  C is the sole underwriter.

The underwriting process goes like this:

–Pershing Square asks C to lead an offering to sell its JCP stock

–C assembles the underwriting/sales group, in this case itself

–C calls clients to get indications of interest and to try out possible prices.

–C sets a price (in this case $12.90 a share), distributes a preliminary prospectus, gets firm commitments from clients and buys the stock from Pershing Square.  This last apparently occurred yesterday.

Technically speaking, client commitments aren’t legally binding.  Unless you’re very big and powerful, however, there’s a fat chance you’ll ever get to see a good IPO allocation again if you go back on your word

–C sells the stock to clients.  This is presumably happening  this morning.

As part of the deal, C gives buyers a final prospectus, which– legally speaking, is the only official offering document.  The client has a brief time to review it and return the stock if he doesn’t like what he reads.  In my experience, however, clients seldom read the final prospectus.  I don’t know anyone who’s ever returned stock.

what bothers me

I’m usually a solidly free markets guy.  Laissez faire and all that.  But Pershing-JCP is a case of corporate bungling on an epic scale.

Ackman enters in cape and tights to “save” a company that’s not a world beater but nevertheless is muddling along.  He installs similarly-clad Ron Johnson as CEO.  Johnson promptly alienates customers, loses a third of company sales and burns up a ton of corporate cash.  All the while he’s defended by Ackman.  Both exit the now-smoking wreckage with a few tepid words of apology.

Yes, both lost money and their reputations are tarnished a bit   …but that doesn’t seem to me to be enough.  On the other hand, I’m not sure what other penalties there should be.  Disbarment?

Maybe it’s just the speed at which disaster struck that disturbs me. As I think about it, I can come up with many examples of the same incompetence  in slower-moving corporate train wrecks.  Think:  C. Michael Armstrong at ATT, and then Citigroup (as a board member).  How about Carly Fiorina…or just about any CEO…at Hewlett-Packard?

one other note:  It’s interesting that C was able to find buyers for 18% of the stock at $12.90.  A floor on the stock price?