- Shoham Jun 13, 2014 at 02:08: AM
Shoham
Member
Hi Everyone.
Since I have a background in accounting and Mergers and Acquisitions, I was asked to write a glossary of relevant terms and discuss them as they specifically apply to the Allergan-Valeant situation.
I'm posting under my own name since I have no relations with either Allergan or Valeant that would preclude me from doing so (in fact, I have no relations with either company whatsoever, nor do I own shares of either). That said, a family member (with a different last name) and many friends are Allergan employees; and it is for their benefits, primarily, that I'm writing.
I have not been paid to write this, and I'm not interested in generating any business of any kind from this writing. Please do not rely on this to make any financial decisions without first consulting with a professional, as a lot of this represent my opinion and has not been vetted for any purpose beyond generating a discussion.
Dan.
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Hostile Takeover Terms
Hostile Takeover -- Taking over a company despite the objection of the current board of directors. Since the BoD must agree to the deal to sign the necessary papers, a necessary step in any Hostile takeover is a replacement of the BoD through a shareholder meeting (or multiple meetings) and vote. In this battle, shareholder Ackman is attempting to organize a special shareholder meeting where shareholders will vote to replace 6 of the 9 board members with ones to be proposed by (and thus loyal to) Ackman. If successful, these new board members will have a majority of the board and able to negotiate a deal to Ackman liking.
Poison Pill -- Formally known as a Shareholders Right Plan, is a rule designed to prevent an aggressive party (such as Ackman) from buying so many shares that they can single-handedly gain control of the board of directors and agree to a deal that may be to the detriment of the remaining shareholders. A typical plan involves a rule that if any shareholder, or a group of colluding shareholders reach a certain threshold (typically, and in this case, 10%), all *other* shareholders receive, for free or nearly so, one new share for each one they already own. This effectively reduces the aggressor's holding down to 5% (and if they try to buy back up, it will trigger again), essentially making it impossible to single-handedly gain control of the board. While originally controversial -- since it appears to violate a cardinal rule of shareholding: that all shareholders are treated equally -- in the 1980's (the heydays of hostile takeovers), courts have ruled them legal since they give the board an opportunity to find the best possible deal for shareholders. Typical poison pill rules have an effective period of one year (considered reasonable to seek an alternative), and, in any event, if a new (pro-merger) board is elected, it will immediately remove the Plan. The term poison pill, intended to evoke the cultural image of yesteryear spies who, supposedly, carried poison pills with them to be used in case they are captured (so they'll avoid the risk of being tortured into helping the enemy), is somewhat incorrect since the company itself is never harmed, only the pro-merger shareholders. Allergan board, immediately upon hearing that Ackman has amassed nearly 10% stake, activated such a poison pill. Until the pill expires (one year), or there is a new (pro-Ackman) board of directors who will remove the pill, Ackman is effectively unable to buy more shares or enter into an agreement with other shareholders. Even his non-binding referendum concept (which he was thus forced to drop), might have triggered the pill (so none of the big shareholders wanted to participate and take that risk)
Proxy Fight -- When shareholders vote, they usually (nowadays, essentially always) do it by proxy. They assign ("proxy") their right to vote to someone who committed to cast the vote in a particular manner. When two parties compete for control of the Board, as is the case now, each party attempts to persuade holders of as many shares as possible to proxy the voting rights of their shares. Ackman's announced effort to replace 6 board member is a classic proxy fight.
Fiduciary -- The legal term that indicates the responsibility of officeholders to their constituencies regardless of their own interests or feelings. In the context of a hostile takeover, it refers to the board of directors fiduciary duties to the shareholders and (usually) no one else. (I say "usually," because in Allergan's case there is a mention in the Bylaws of other constituencies, giving the board some modest leeway -- even that much leeway is somewhat unusual).
Green Mail -- A legal, but widely despised, tactic where a hostile takeover bidder agrees to go away in exchange for cash. Even the most hard core capitalists profess hostility to the concept, since it results in self-enrichment at the expense of other shareholders (nonetheless, when offered, many took the cash). It is legal because of the view that if the company wants to pay (as determined by the board of directors in the fiduciary interest of all shareholders) and the would-be-acquirer is willing to take the cash, no other party would have a standing to object. At this time, there is no indication of any Green Mail in play; but Ackman (who would be the obvious Green Mailer, if such were to transpire) is still far from his endplay, so who knows?
White Knight -- A friendly acquisition, with another party, that is undertaken to prevent a hostile takeover (the term plays of the cultural concept of a good (white) knight coming to the rescue at the last minute). It's a defensive strategy that is almost always explored, but very rarely succeeds since the new buyer (the White Knight), who wasn't in acquisition talks beforehand (when they could have, presumably, negotiated a friendly deal) is effectively being invited into the much less attractive (from the buyer's perspective) competitive bid situation. The best prospect for a White Knight is if a major player, who would have been content to let a smaller player (who is not a head-to-head competitor) control some market segment, can't allow another major player (who is) win the acquisition and lock them out of that market. Allergan is rumored to have gone through the exercise of asking a few potential White Knights -- Johnson & Johnson and Sanofi -- if they'd be interested and they weren't. Given the overall alignment of players, there is minimal expectation that a White Knight will emerge in this case.
Scorched Earth Defense -- Any of a number of defensive tactics that reduce the company's attractiveness to a buyer, but would also damage the company even if it were to stay independent. The term comes from a military strategy, used since ancient times, where a retreating army destroys anything of value in the territory it cedes to the enemy. Examples of Scorched Earth defenses include selling core assets, taking on debt, giving employees generous contracts, and many others. To be legal, such strategies should be in the benefit of the shareholders or else the board is failing in its fiduciary duty (this is not necessarily a contradiction: Many strategies that hurt the company can benefit the shareholders, for example, if the cash obtained by selling assets or taking on debt is given to the shareholders). After CEO Pyott used the word "battle" in a letter to employees, Ackman accused him of using "Scorched Earth." None of the actions taken by Allergan thus far can be described as Scorched Earth.
Activist Investors -- Investors who take an equity position in a company with the intention of pressuring the board of directors to change strategy, and sometimes replacing the board altogether. Pressuring the board to sell the company (often at a premium over the price the investor paid for their shares) is a common objective of activist investors. Ackman is one of the most notable activist investors. In this instance, he has taken activist investing a step further by having a buyer lined up before he even started buying the shares.
Shareholder Lawsuit -- The Board of Directors has a fiduciary responsibility to diligently act in the interest of the shareholders (see "Fiduciary"). If they fail to do so, any shareholder may sue to recover provable damages. In practice, courts tend to give Boards maximum leeway and trust that their decisions, unless strong evidence to the contrary is presented, are made with the honest intention of exercising such duties. The major exception is when financial shenanigans or fraudulent accounting has been practiced and the board failed to exercise sufficient supervision to prevent it. Shareholders who lost money may recover losses (if there is anything left of the company). Shareholder lawsuits can turn a survivable accounting fiasco into a complete bankruptcy since a company already weakened by the scandal is almost never able to cover shareholders losses. When Allergan filed with the SEC a presentation questioning the accounting practices and sustainability of Valeant, they effectively put the Valeant board on notice that they may be on a short fuse to the death spiral of accounting scandal, share price decline, shareholders lawsuit, and bankruptcy; and likewise, warn Allergan shareholders not to trade their Allergan shares for Valeant. This is somewhat of a table-turn maneuver, since often it is the hostile acquirer accusing the board of the target for failing to act in the interest of it's shareholders (and potentially facing a suit -- although it is very hard to get a court to rule against a board for declining a merger, unless the rejection was for the benefit of a clearly inferior deal).
Forensic Accounting -- A subcategory of accounting that specializes in sleuthing when financial crimes have potentially been committed or deceptive financial statements are presented. When Allergan hired two Forensic Accounting firms to study Valeant financial reports and statements, a never-been-used-before defense (to my memory), it was making a not-subtle-at-all insinuation that Valeant financial reports are at least deceptive and possibly criminal (see Shareholder Lawsuit).
Shares Buyback -- A company can buy its own shares back from investors, either on the open market or through a special offering. Companies take this action in various situations, not just hostile takeover defense, but it has multiple effects that improve takeover defenses as it increases the share price (requiring the acquirer to bid higher yet), reduces the cash and borrowing power of the target (making it harder for the acquirer to finance the acquisition), and eliminate from the voting rolls shareholders who do not believe in the share's future appreciation potential (the same shareholders who are more likely to vote for an acquisition). Shares thus purchased become "Treasury Shares." While Treasury Shares do not vote, they are available to the board of director to issue to constituencies which do vote (such as employees, management, acquired companies, friendly hedge funds, etc. -- of course, the company should get fair value for such shares, they can't just be handed over to create friendly voters). There has been no talk, thus far of a Share Buyback at Allergan, but it is a frequently speculated upon strategy by the analysts. (A question that, to my knowledge, has never been tested in court, is if a share buyback can trigger a Poisson pill: For instance, if Ackman's 9.7% were to become 10% -- the threshold for Allergan's current poison pill -- entirely through the reduction in the number of shares outstanding caused by a buyback, but through no actions of Ackman, would that trigger the poison pill?)
General Takeover Terms (Hostile or Friendly)
Friendly Takeover -- An acquisition done with the consent and co-operation of the target Board of Directors. Many times a Hostile Takeover effort turns friendly once the price offered is raised sufficiently. In a friendly takeover, both companies work together to ensure a smooth transition and to assure that the resulting merged cooperation is as valuable as possible. The vast majority of mergers and acquisitions are Friendly. The analyst community is virtually unanimous that Valeant bid for Allergan has no realistic chance of becoming friendly with the current board, since Allergan board has made it clear they do not consider Valeant shares to be a worthy consideration, and Valeant has no other means of offering sufficient considerations.
Management Buy Out -- An acquisition made by a team that primarily include the incumbent management of the company and sympathetic investors. It is usually heavily financed through debt and sometimes through asset stripping (selling parts of the company). Investors often like Management Buy Outs since the company will be run by the people who best know how to -- the current management -- and, now that they own the company and have a huge mortgage to pay, will be very diligent in finding non-destructive cost reductions and revenue gains opportunities. There has been no significant talk of MBO possibility in this instance, but it is the ultimate hostile takeover defense -- as it permanently eliminate any outsider's opportunity to gain control of the company without the consent of management.
Asset Stripping -- Selling significant assets of a company to pay part of the cost of a takeover (friendly or hostile). There has been no specific talk of asset stripping in this instance, but many analysts think that if Valeant were to acquire Allergan, everyone would be better off if DARpin were sold to another party rather than kept as a contingent values right (as proposed by Valeant).
Synergy -- The economic rationale for any merger (friendly or hostile) is that the combined company will be worth more than the sum of its parts. This could be through improved sales (the combined sales force, now empowered to sell a broader array of products, will sell more than the two sales forces separately), cost reductions (duplicative functions, such as accounting, could be reduced), or both. In Valeant presentations, they have used the word Synergy almost synonymously with laying off employees ("We achieved 95% synergy in G&A (General and Administrative) expense")
Organic Growth -- Growth in company sales net of the effects of acquisitions and divestitures (there is some heated debate if it should also be net of discontinuations). The most common way to compute it is by looking only at products that the company has been selling for over a year. If an acquisitive company is showing slow or negative organic growth, it demonstrates that it is destroying value and making deals with no economical rationale -- an ultimately unsustainable business model. Conversely, if it is generating high organic growth, it proves that the synergies (see entry) are real and genuine value is generated for the shareholders with each acquisition. This is a point of huge contention between Allergan and Valeant, and perhaps the sharpest knife in Allergan's attack on Valeant business model (and also the most responded to in Valeant's counterarguments). Backed by Forensic Accounting (see entry) consulting firms, Allergan asserts that Valeant claims of solid organic growth numbers are deceptive and that the actual numbers are nearly zero or negative. Valeant stands by their claims and asserts back that it is Allergan's analysis that is deceptive.
Good Will -- An accounting term that refers to the value paid for an acquired company in excess of it's Fair Market Value (for a publicly traded company, such as Allergan, the FMV is its trading price). The Good Will becomes an asset on the acquiring company's book, but must be re-evaluated annually (more frequently if there are relevant events) to see if it is still worth what was paid. If not, it is reduced ("Impaired" in accountant-speak) generating an instantaneous "one-time loss." (Good Will can only be Impaired downward, there are no allowed corresponding accounting processes in the opposite direction). Valeant critics have pointed out that Valeant destroys so much value in their acquisition process that these "one-time losses" due to Good Will impairments are so frequent as to dwarf the actual profits they make selling drugs. Valeant argues that Good Will Impairment losses are just accounting artifact, as they do not involve the important metric (according to Valeant) of cash flow.
Insider Trading -- A criminal activity where an individual who possess material confidential information about a company, not available to the general public, and in violation of fiduciary trust, uses such information to make profitable trades on their own behalf. Convictions often lead to prison terms, return of ill-gotten gains, hefty fines, and lifetime bans from the financial industry. A commonly investigated form of insider trading is when an individual who may have been tipped off buys shares in a target company just before an acquirer announces their intention (and the target's share price inevitably jumps). This practice is outlawed since it disadvantages the other investors, not privy to such insider information, and thus undermine trust in the overall integrity of the market. When Ackman bought nearly 10% of Allergan, knowing that Valeant is about to make an offer -- and making a huge paper gain when they did -- many questioned if his activities constitute Insider Trading. The prevailing opinion in the security laws community is that the information was given to him in the interests of Valeant (and thus not in violation any fiduciary duty) making him, effectively, a co-bidder and not an inside-trader. Nonetheless, Ackman is often dogged by reporters implying that he took advantage of a legal loophole in the Insider Trading laws to gain an advantage over the non-insider investors. (His answer is that the price increase in Allergan share price caused by his action benefited all shareholders, and even the ones who sold shares to him before the Valeant offer was public didn't lose anything relative to where they would have been without his actions altogether)
Board of Directors -- A group of individuals elected by and representative of the share holders of the company (sometimes just called "the board"). It is somewhat analogous to the legislative branch of government. The BoD does not involve itself in day-to-day activities of the company (although some members of the Board, for example CEO Pyott, may be full time managers or employees in addition to being board members), but rather issues policies and rules that are binding to the management team. Decisions of momentous or direct shareholder impact may only be made by the BoD. The Allergan Board has voted (Unanimously) to reject all Valeant acquisition offers to date. Therefore, the only realistic way for Valeant to complete the deal would be for shareholders to vote for a new BoD which will be friendly to Valeant's offer.
Leverage -- Any of various ratios measuring the debt of a company relative to its assets or ability to pay. Without doing anything different, companies with higher leverage can achieve a higher rate of return for their shareholders, but also carry higher risk; since even a minor fluctuation in ability to pay debt holders carries the risk of default and consequent wiping out of shareholders altogether. This is somewhat analogous to the Loan-to-Value (LTV) in a home mortgage, where a higher LTV allows a home buyer to buy a pricier house for the same down payment, and, if home prices were to appreciate, have a higher percentage gain on the investment; but a higher LTV also carries a greater risk of going upside-down in a downturn and losing the entire investment. In this instance, the leverage ratio of relevance is debt/EBITDA (see entry). Valeant has a debt/EBITDA ratio a bit above 4.0, meaning they owe over 4 years worth of cash flow; considered unhealthy and generally precludes additional borrowing on sensible terms. The original Valeant offer for Allergan, even with additional borrowing of the $48 per share for the cash portion of the offer, would have created a combined company with a much improved debt ratio of 3.5 (since Allergan would add a lot of cash flow and minimal debt). The current offer, which includes $72 cash only slightly improves the leverage; and thus largely taps Valeant ability to borrow, which means that $72 is very close to the maximum cash it is able to offer for Allergan (unless they find cash somewhere other than the debt market -- for instance through asset sales or equity offerings).
Credit Rating -- An evaluation, performed by an independent agency, of the creditworthiness of a corporate borrower. This is very analogous to the FICO score of individual borrowers. Moody's, one of the major credit rating agencies, maintains a rating of Valeant debt. Moody's has a system where "A" bonds are considered to have minimal risk, "B" have notable risk, and "C" are already in trouble. They further divide each category with additional letters and numbers. (Other rating agencies use similar systems and are usually largely in synch with each other). The credit rating is a principal driver of the interest rate a company is able to obtain in the credit markets. Valeant debt is rated Ba3, which is in the middle of "junk bond territory" (see entry), primarily because the debt Leverage (see entry) is above an unhealthy 4.0. Prior to the announced Allergan bid, Moody's outlook for Valeant was "negative." -- meaning that Moody's expected the next change to at least twice as likely be downward as upward. Once the bid was announced, Moody's changed the outlook to "Developing" (meaning -- wait and see), and stated that if the Leverage were to decline to below 3.5 (as would have been under the original $48 offer), Valeant credit rating would improve; whereas if it will go well above 4.0, rating would decline (the $72 offer leaves it around 4.0). Allergan rating is A3 (solid investment grade), with a leverage just above 1.0. Before the announced bid, the outlook was "stable," but was changed to "negative" with the bid to account for the possibility that the takeover will succeed and then all Allergan debt would become Valeant debt with junk status.
Junk Bonds -- A term popularized, and often vilified, during the 1980's boom in takeovers (including many hostile ones). It refers to a debt that is considered to have significant risk of default. To entice lenders to accept Junk Bonds, they offer interest rates significantly above market rates for less risky debt (bond traders prefer to use the term "High Yield" to "Junk" to emphasize the attractive aspect of such debt). A very hard rule in corporate law is that all debt, including "Junk Bonds," must be fully paid with interest, before any shareholder may receive a penny. So, no matter how "junky" the bonds might be, the shares are always "junkier." Valeant debt is rated as "Junk Bond." None of Allergan debt is "Junk." This fact supports Allergan's assertion that Valeant shares are junk.
SEC (Securities and Exchange Commission) -- An agency of the US Federal government responsible for enforcing security laws and the orderly formation of capital. It investigates potential insider trading and accounting fraud. Publicly traded companies, such as Allergan and Valeant, must follow strict rules, overseen by the SEC, with regard to transacting, and disclosing information. The rules require companies to file reports for public availability disclosing, in significant details, their financial statements on quarterly and annual basis (the latter in even greater details). In addition, special events, material new information, legal stock transactions by insiders, and others must be publicly filed (see section on SEC forms). Valeant was able to generate a bid for Allergan, without even talking to Allergan (much like offering to buy someone's house without ever been allowed to see it inside), based entirely on what they were able to read from Allergan's SEC filings. Likewise, much of Allergan's attack on Valeant's business model is based on information available in Valeant's SEC filings. By filing it's Valeant-bashing presentations directly with the SEC, Allergan is making the point that it strongly stands behind those presentations (it would be fraudulent to knowingly file falsehood); and also, may sets the stage for asking the SEC to investigate Valeant (since some assertions made by Allergan arguably border on accusing Valeant of fraud) (or, at least, instill some doubt in shareholders of both companies regarding Valeant's worth).
Roll-up -- A business model that affects a rapid series of acquisitions, with cost-cutting and duplication-elimination (see synergies) as the primary source of value creation. Because accounting rules are designed to treat acquisitions as unique "one-time" events, rather than an ongoing business model in its own right; the financial statements of roll-up companies are always considered complex and conducive to opaque, deceptive, or even fraudulent, reporting. Because acquirers often use their own stocks to pay for acquisitions, as Valeant is offering Allergan, there is every interest to manipulate such financial statements so as to artificially inflate the stock price. Roll-ups are a tiny fraction of all businesses, but account for almost all famously massive securities fraud events outside the financial sector of the last 20 years, including Enron, Tyco, WorldCom, Waste Management, Cendant, and others. Allergan made that point in its investor presentation when it openly compared Valeant to Tyco (whose CEO ended up in prison).
Contingent Value Right (CVR) -- When buyers and sellers have an unbridgeable difference of opinion with regard to the value of an asset, a contingent value right may provide a way to close the gap. The asset is carved out of the rest of the deal and it's value is allowed to surmise separately. Contingent on its future performance, the sellers will receive, in the future, some formula return value. The CVR itself is a security (like a stock) that investors can buy and sell. Allergan investors that Pershing Square and Valeant spoke with, apparently, indicated that they don't think Valeant will be able to nurse the mid-term R&D effort required to bring the potentially huge DARpin drug to commercialization; and that too much value will be destroyed by failing to do so (about $20B). Valeant publicly stated that they don't believe DARpin is that huge, but included a CVR in their latest offer where they will insulate the DARpin team, keep the R&D staff, and then apportion to selling Allergan shareholders a portion of the future DARpin sales. Analysts were unimpressed with the prospect of a carved out team without the overall Allergan R&D infrastructure and think that Valeant would be better off just selling DARpin to an entity that is R&D-enabled.
Leveraged Buy Out (LBO) -- Borrowing money to buy a company, and then paying off the debt using company profits (and potentially asset sales). Many acquisition strategies, friendly, hostile, and (especially) management, rely on LBO. In general, the level of debt required to buy a company outright bring the leverage (see entry) to such a high level that the debt used to make the acquisition is rated as junk bonds (see entry) and thus require high interest payments. LBO acquirers, facing the need to make high regular interest payments, are often forced into cost-cutting or investment-reductions to stay afloat. However, a successful LBO can be extremely lucrative to the buyer since they will end up owning the entire company (after paying off its debt). The Valeant offer to buy Allergan is partially an LBO (the cash portion). A potential management buy out (see entry) counter-play would almost have to be entirely an LBO.
EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) -- An accounting term that tries to measure how much cash the company generates (or will generate) available to pay on it's debt. Earnings, by accounting rules, is computed by subtracting expenses from revenues. However, some expenses do not actually use up any cash (depreciation and amortization), and thus are irrelevant with regard to the company's ability to pay it's debts. Likewise, taxes are only relevant if the company is still making a profit after paying interest, and thus also irrelevant for this purpose. The ratio of debt to EBITDA is a quick guide to how leveraged, or risky, is the company.
Tax Inversion -- The US is the only country in the world that taxes the worldwide earnings of its citizen (including corporate citizens). All other countries tax only the portion of earnings that takes place on their own soil. It is therefore potentially tax-advantageous for a US corporation to re-domicile to another country (and then continue doing business in the US as a foreign corporation). This is the corporate equivalence of renouncing one's US citizenship so as to not have to pay US taxes on foreign earnings. Furthermore, through carefully planned transfer pricing (the fees charged by one part of a company to another), a corporation can arrange to have all it's profits accumulate in a low-tax country. For example, the company can have a "patent owning division" in a low-tax country, and then have that division charge all operating divisions patent license fees that are so high as to make all other divisions unprofitable (and thus pay no local corporate income taxes in whichever countries they operate), while the "patent owning division" accumulate all the profits in it's low tax haven. This is all perfectly legal, but often attracts the scrutiny of tax auditors, who may then disallow various practices (for instance, argue that the patent fees are unjustified). The process of expatriating a US corporation is incredibly complex and expensive (and invokes various "exit taxes"), but is made a lot simpler when a foreign corporation buys a US corporation and the US corporation simply ceases to exist (without ever expatriating). The tax benefits can be so high that sometimes it is worthwhile for a US corporation to buy a foreign company but structure the deal as if it was the foreign company that bought the US one. This process is called Tax Inversion. Valeant, in its present form, was created when a California company (Valeant, formerly ICN) purchased a troubled Canadian firm, Biovail, but structured the transaction as an Inversion (so, technically, Biovail acquired Valeant and selected the latter's name for the surviving corporation). Some of the value creation Valeant claims will accrue through a merger will stem from this inversion process (since Allergan will no longer be a US corporation). Among the potential counterstrategies Allergan is rumored to pursue is to affect a tax inversion of it's own by buying a foreign corporation, for instance Ireland's Shire (and thus eliminate one of the benefits of a Valeant deal). In it's presentation, Allergan warned that Valeant's tax strategies are so complex as to be unmanageable, attract the attention of auditors and regulators, and may collapse altogether when national taxing authorities start cracking down on such techniques and legislators start closing such loopholes.
Important SEC Forms (All forms filed with SEC are publicly available)
(I'm only listing those because often analysts, reporters, and other financial community members mention SEC filings by form number with no further description. There are many more forms, but these are the most relevant ones here).
13D (5% ownership) -- Whenever any shareholder reaches 5% ownership of a company they must file a form 13D with the SEC disclosing their share ownership and intentions. The rules allow 10 days to make the filing and do not forbid additional buying during those 10 days. Ackman famously surprised everyone by rapidly accumulating from 5% to 9.7% during those 10 days (buying at a low price before the bid was announced). Consequently, there have been some calls, to eliminate the "anachronistic" 10-days "loophole."
10K (annual report) -- A report that must be filed by every public company once a year including its annual financial statements, discussion of business, and outlook. For large companies, it must be filed within 60 days of yearend. The report must be audited by an independent CPA.
10Q (quarterly report) -- A shorter version of the 10K annual report filed quarterly, including its quarterly financial statements. For large companies, it must be filed within 40 days of quarter end (unless its the last quarter of the year, in which case it is combined with the annual report). 10Q reports do not need to be audited. The report must include a contrast between the current quarter and the same quarter the prior year to allow investors to judge for themselves if the company is growing or shrinking and other trends of relevance, net of potential seasonality effects. A common criticism of Valeant is that such Year-over-Year comparisons are a near-impossibility because the rapid pace of acquisitions and accounting presentation choices that mask what component of revenues come from newly acquired business and what from previously. It is often noted that subsequent to the B+L purchase, in August 2013, Valeant made no acquisition large enough to distort the numbers significantly; and therefore, absent an Allergan acquisition (or a very large surprise transaction -- acquisition or divestiture -- between now and the end of the September), the 10Q for the 3rd quarter of 2014 (and even more so, the 4th quarter), for the first time in years, will begin to show how well Valeant is growing (or not) when it is not acquiring.
8K (special event) -- Whenever any of a broad spectrum of events that are outside the normal course of business happens, the company must file, within 4 days, an 8K form with the SEC where the event is disclosed and, if appropriate, explained. Example of events that trigger an 8K reporting requirement include the hiring, firing, or departure of a senior officer or board member; issuing material debt or equity; impairments, defaults, changes in corporate structure, change of accounting firm, and so on.
Since I have a background in accounting and Mergers and Acquisitions, I was asked to write a glossary of relevant terms and discuss them as they specifically apply to the Allergan-Valeant situation.
I'm posting under my own name since I have no relations with either Allergan or Valeant that would preclude me from doing so (in fact, I have no relations with either company whatsoever, nor do I own shares of either). That said, a family member (with a different last name) and many friends are Allergan employees; and it is for their benefits, primarily, that I'm writing.
I have not been paid to write this, and I'm not interested in generating any business of any kind from this writing. Please do not rely on this to make any financial decisions without first consulting with a professional, as a lot of this represent my opinion and has not been vetted for any purpose beyond generating a discussion.
Dan.
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Hostile Takeover Terms
Hostile Takeover -- Taking over a company despite the objection of the current board of directors. Since the BoD must agree to the deal to sign the necessary papers, a necessary step in any Hostile takeover is a replacement of the BoD through a shareholder meeting (or multiple meetings) and vote. In this battle, shareholder Ackman is attempting to organize a special shareholder meeting where shareholders will vote to replace 6 of the 9 board members with ones to be proposed by (and thus loyal to) Ackman. If successful, these new board members will have a majority of the board and able to negotiate a deal to Ackman liking.
Poison Pill -- Formally known as a Shareholders Right Plan, is a rule designed to prevent an aggressive party (such as Ackman) from buying so many shares that they can single-handedly gain control of the board of directors and agree to a deal that may be to the detriment of the remaining shareholders. A typical plan involves a rule that if any shareholder, or a group of colluding shareholders reach a certain threshold (typically, and in this case, 10%), all *other* shareholders receive, for free or nearly so, one new share for each one they already own. This effectively reduces the aggressor's holding down to 5% (and if they try to buy back up, it will trigger again), essentially making it impossible to single-handedly gain control of the board. While originally controversial -- since it appears to violate a cardinal rule of shareholding: that all shareholders are treated equally -- in the 1980's (the heydays of hostile takeovers), courts have ruled them legal since they give the board an opportunity to find the best possible deal for shareholders. Typical poison pill rules have an effective period of one year (considered reasonable to seek an alternative), and, in any event, if a new (pro-merger) board is elected, it will immediately remove the Plan. The term poison pill, intended to evoke the cultural image of yesteryear spies who, supposedly, carried poison pills with them to be used in case they are captured (so they'll avoid the risk of being tortured into helping the enemy), is somewhat incorrect since the company itself is never harmed, only the pro-merger shareholders. Allergan board, immediately upon hearing that Ackman has amassed nearly 10% stake, activated such a poison pill. Until the pill expires (one year), or there is a new (pro-Ackman) board of directors who will remove the pill, Ackman is effectively unable to buy more shares or enter into an agreement with other shareholders. Even his non-binding referendum concept (which he was thus forced to drop), might have triggered the pill (so none of the big shareholders wanted to participate and take that risk)
Proxy Fight -- When shareholders vote, they usually (nowadays, essentially always) do it by proxy. They assign ("proxy") their right to vote to someone who committed to cast the vote in a particular manner. When two parties compete for control of the Board, as is the case now, each party attempts to persuade holders of as many shares as possible to proxy the voting rights of their shares. Ackman's announced effort to replace 6 board member is a classic proxy fight.
Fiduciary -- The legal term that indicates the responsibility of officeholders to their constituencies regardless of their own interests or feelings. In the context of a hostile takeover, it refers to the board of directors fiduciary duties to the shareholders and (usually) no one else. (I say "usually," because in Allergan's case there is a mention in the Bylaws of other constituencies, giving the board some modest leeway -- even that much leeway is somewhat unusual).
Green Mail -- A legal, but widely despised, tactic where a hostile takeover bidder agrees to go away in exchange for cash. Even the most hard core capitalists profess hostility to the concept, since it results in self-enrichment at the expense of other shareholders (nonetheless, when offered, many took the cash). It is legal because of the view that if the company wants to pay (as determined by the board of directors in the fiduciary interest of all shareholders) and the would-be-acquirer is willing to take the cash, no other party would have a standing to object. At this time, there is no indication of any Green Mail in play; but Ackman (who would be the obvious Green Mailer, if such were to transpire) is still far from his endplay, so who knows?
White Knight -- A friendly acquisition, with another party, that is undertaken to prevent a hostile takeover (the term plays of the cultural concept of a good (white) knight coming to the rescue at the last minute). It's a defensive strategy that is almost always explored, but very rarely succeeds since the new buyer (the White Knight), who wasn't in acquisition talks beforehand (when they could have, presumably, negotiated a friendly deal) is effectively being invited into the much less attractive (from the buyer's perspective) competitive bid situation. The best prospect for a White Knight is if a major player, who would have been content to let a smaller player (who is not a head-to-head competitor) control some market segment, can't allow another major player (who is) win the acquisition and lock them out of that market. Allergan is rumored to have gone through the exercise of asking a few potential White Knights -- Johnson & Johnson and Sanofi -- if they'd be interested and they weren't. Given the overall alignment of players, there is minimal expectation that a White Knight will emerge in this case.
Scorched Earth Defense -- Any of a number of defensive tactics that reduce the company's attractiveness to a buyer, but would also damage the company even if it were to stay independent. The term comes from a military strategy, used since ancient times, where a retreating army destroys anything of value in the territory it cedes to the enemy. Examples of Scorched Earth defenses include selling core assets, taking on debt, giving employees generous contracts, and many others. To be legal, such strategies should be in the benefit of the shareholders or else the board is failing in its fiduciary duty (this is not necessarily a contradiction: Many strategies that hurt the company can benefit the shareholders, for example, if the cash obtained by selling assets or taking on debt is given to the shareholders). After CEO Pyott used the word "battle" in a letter to employees, Ackman accused him of using "Scorched Earth." None of the actions taken by Allergan thus far can be described as Scorched Earth.
Activist Investors -- Investors who take an equity position in a company with the intention of pressuring the board of directors to change strategy, and sometimes replacing the board altogether. Pressuring the board to sell the company (often at a premium over the price the investor paid for their shares) is a common objective of activist investors. Ackman is one of the most notable activist investors. In this instance, he has taken activist investing a step further by having a buyer lined up before he even started buying the shares.
Shareholder Lawsuit -- The Board of Directors has a fiduciary responsibility to diligently act in the interest of the shareholders (see "Fiduciary"). If they fail to do so, any shareholder may sue to recover provable damages. In practice, courts tend to give Boards maximum leeway and trust that their decisions, unless strong evidence to the contrary is presented, are made with the honest intention of exercising such duties. The major exception is when financial shenanigans or fraudulent accounting has been practiced and the board failed to exercise sufficient supervision to prevent it. Shareholders who lost money may recover losses (if there is anything left of the company). Shareholder lawsuits can turn a survivable accounting fiasco into a complete bankruptcy since a company already weakened by the scandal is almost never able to cover shareholders losses. When Allergan filed with the SEC a presentation questioning the accounting practices and sustainability of Valeant, they effectively put the Valeant board on notice that they may be on a short fuse to the death spiral of accounting scandal, share price decline, shareholders lawsuit, and bankruptcy; and likewise, warn Allergan shareholders not to trade their Allergan shares for Valeant. This is somewhat of a table-turn maneuver, since often it is the hostile acquirer accusing the board of the target for failing to act in the interest of it's shareholders (and potentially facing a suit -- although it is very hard to get a court to rule against a board for declining a merger, unless the rejection was for the benefit of a clearly inferior deal).
Forensic Accounting -- A subcategory of accounting that specializes in sleuthing when financial crimes have potentially been committed or deceptive financial statements are presented. When Allergan hired two Forensic Accounting firms to study Valeant financial reports and statements, a never-been-used-before defense (to my memory), it was making a not-subtle-at-all insinuation that Valeant financial reports are at least deceptive and possibly criminal (see Shareholder Lawsuit).
Shares Buyback -- A company can buy its own shares back from investors, either on the open market or through a special offering. Companies take this action in various situations, not just hostile takeover defense, but it has multiple effects that improve takeover defenses as it increases the share price (requiring the acquirer to bid higher yet), reduces the cash and borrowing power of the target (making it harder for the acquirer to finance the acquisition), and eliminate from the voting rolls shareholders who do not believe in the share's future appreciation potential (the same shareholders who are more likely to vote for an acquisition). Shares thus purchased become "Treasury Shares." While Treasury Shares do not vote, they are available to the board of director to issue to constituencies which do vote (such as employees, management, acquired companies, friendly hedge funds, etc. -- of course, the company should get fair value for such shares, they can't just be handed over to create friendly voters). There has been no talk, thus far of a Share Buyback at Allergan, but it is a frequently speculated upon strategy by the analysts. (A question that, to my knowledge, has never been tested in court, is if a share buyback can trigger a Poisson pill: For instance, if Ackman's 9.7% were to become 10% -- the threshold for Allergan's current poison pill -- entirely through the reduction in the number of shares outstanding caused by a buyback, but through no actions of Ackman, would that trigger the poison pill?)
General Takeover Terms (Hostile or Friendly)
Friendly Takeover -- An acquisition done with the consent and co-operation of the target Board of Directors. Many times a Hostile Takeover effort turns friendly once the price offered is raised sufficiently. In a friendly takeover, both companies work together to ensure a smooth transition and to assure that the resulting merged cooperation is as valuable as possible. The vast majority of mergers and acquisitions are Friendly. The analyst community is virtually unanimous that Valeant bid for Allergan has no realistic chance of becoming friendly with the current board, since Allergan board has made it clear they do not consider Valeant shares to be a worthy consideration, and Valeant has no other means of offering sufficient considerations.
Management Buy Out -- An acquisition made by a team that primarily include the incumbent management of the company and sympathetic investors. It is usually heavily financed through debt and sometimes through asset stripping (selling parts of the company). Investors often like Management Buy Outs since the company will be run by the people who best know how to -- the current management -- and, now that they own the company and have a huge mortgage to pay, will be very diligent in finding non-destructive cost reductions and revenue gains opportunities. There has been no significant talk of MBO possibility in this instance, but it is the ultimate hostile takeover defense -- as it permanently eliminate any outsider's opportunity to gain control of the company without the consent of management.
Asset Stripping -- Selling significant assets of a company to pay part of the cost of a takeover (friendly or hostile). There has been no specific talk of asset stripping in this instance, but many analysts think that if Valeant were to acquire Allergan, everyone would be better off if DARpin were sold to another party rather than kept as a contingent values right (as proposed by Valeant).
Synergy -- The economic rationale for any merger (friendly or hostile) is that the combined company will be worth more than the sum of its parts. This could be through improved sales (the combined sales force, now empowered to sell a broader array of products, will sell more than the two sales forces separately), cost reductions (duplicative functions, such as accounting, could be reduced), or both. In Valeant presentations, they have used the word Synergy almost synonymously with laying off employees ("We achieved 95% synergy in G&A (General and Administrative) expense")
Organic Growth -- Growth in company sales net of the effects of acquisitions and divestitures (there is some heated debate if it should also be net of discontinuations). The most common way to compute it is by looking only at products that the company has been selling for over a year. If an acquisitive company is showing slow or negative organic growth, it demonstrates that it is destroying value and making deals with no economical rationale -- an ultimately unsustainable business model. Conversely, if it is generating high organic growth, it proves that the synergies (see entry) are real and genuine value is generated for the shareholders with each acquisition. This is a point of huge contention between Allergan and Valeant, and perhaps the sharpest knife in Allergan's attack on Valeant business model (and also the most responded to in Valeant's counterarguments). Backed by Forensic Accounting (see entry) consulting firms, Allergan asserts that Valeant claims of solid organic growth numbers are deceptive and that the actual numbers are nearly zero or negative. Valeant stands by their claims and asserts back that it is Allergan's analysis that is deceptive.
Good Will -- An accounting term that refers to the value paid for an acquired company in excess of it's Fair Market Value (for a publicly traded company, such as Allergan, the FMV is its trading price). The Good Will becomes an asset on the acquiring company's book, but must be re-evaluated annually (more frequently if there are relevant events) to see if it is still worth what was paid. If not, it is reduced ("Impaired" in accountant-speak) generating an instantaneous "one-time loss." (Good Will can only be Impaired downward, there are no allowed corresponding accounting processes in the opposite direction). Valeant critics have pointed out that Valeant destroys so much value in their acquisition process that these "one-time losses" due to Good Will impairments are so frequent as to dwarf the actual profits they make selling drugs. Valeant argues that Good Will Impairment losses are just accounting artifact, as they do not involve the important metric (according to Valeant) of cash flow.
Insider Trading -- A criminal activity where an individual who possess material confidential information about a company, not available to the general public, and in violation of fiduciary trust, uses such information to make profitable trades on their own behalf. Convictions often lead to prison terms, return of ill-gotten gains, hefty fines, and lifetime bans from the financial industry. A commonly investigated form of insider trading is when an individual who may have been tipped off buys shares in a target company just before an acquirer announces their intention (and the target's share price inevitably jumps). This practice is outlawed since it disadvantages the other investors, not privy to such insider information, and thus undermine trust in the overall integrity of the market. When Ackman bought nearly 10% of Allergan, knowing that Valeant is about to make an offer -- and making a huge paper gain when they did -- many questioned if his activities constitute Insider Trading. The prevailing opinion in the security laws community is that the information was given to him in the interests of Valeant (and thus not in violation any fiduciary duty) making him, effectively, a co-bidder and not an inside-trader. Nonetheless, Ackman is often dogged by reporters implying that he took advantage of a legal loophole in the Insider Trading laws to gain an advantage over the non-insider investors. (His answer is that the price increase in Allergan share price caused by his action benefited all shareholders, and even the ones who sold shares to him before the Valeant offer was public didn't lose anything relative to where they would have been without his actions altogether)
Board of Directors -- A group of individuals elected by and representative of the share holders of the company (sometimes just called "the board"). It is somewhat analogous to the legislative branch of government. The BoD does not involve itself in day-to-day activities of the company (although some members of the Board, for example CEO Pyott, may be full time managers or employees in addition to being board members), but rather issues policies and rules that are binding to the management team. Decisions of momentous or direct shareholder impact may only be made by the BoD. The Allergan Board has voted (Unanimously) to reject all Valeant acquisition offers to date. Therefore, the only realistic way for Valeant to complete the deal would be for shareholders to vote for a new BoD which will be friendly to Valeant's offer.
Leverage -- Any of various ratios measuring the debt of a company relative to its assets or ability to pay. Without doing anything different, companies with higher leverage can achieve a higher rate of return for their shareholders, but also carry higher risk; since even a minor fluctuation in ability to pay debt holders carries the risk of default and consequent wiping out of shareholders altogether. This is somewhat analogous to the Loan-to-Value (LTV) in a home mortgage, where a higher LTV allows a home buyer to buy a pricier house for the same down payment, and, if home prices were to appreciate, have a higher percentage gain on the investment; but a higher LTV also carries a greater risk of going upside-down in a downturn and losing the entire investment. In this instance, the leverage ratio of relevance is debt/EBITDA (see entry). Valeant has a debt/EBITDA ratio a bit above 4.0, meaning they owe over 4 years worth of cash flow; considered unhealthy and generally precludes additional borrowing on sensible terms. The original Valeant offer for Allergan, even with additional borrowing of the $48 per share for the cash portion of the offer, would have created a combined company with a much improved debt ratio of 3.5 (since Allergan would add a lot of cash flow and minimal debt). The current offer, which includes $72 cash only slightly improves the leverage; and thus largely taps Valeant ability to borrow, which means that $72 is very close to the maximum cash it is able to offer for Allergan (unless they find cash somewhere other than the debt market -- for instance through asset sales or equity offerings).
Credit Rating -- An evaluation, performed by an independent agency, of the creditworthiness of a corporate borrower. This is very analogous to the FICO score of individual borrowers. Moody's, one of the major credit rating agencies, maintains a rating of Valeant debt. Moody's has a system where "A" bonds are considered to have minimal risk, "B" have notable risk, and "C" are already in trouble. They further divide each category with additional letters and numbers. (Other rating agencies use similar systems and are usually largely in synch with each other). The credit rating is a principal driver of the interest rate a company is able to obtain in the credit markets. Valeant debt is rated Ba3, which is in the middle of "junk bond territory" (see entry), primarily because the debt Leverage (see entry) is above an unhealthy 4.0. Prior to the announced Allergan bid, Moody's outlook for Valeant was "negative." -- meaning that Moody's expected the next change to at least twice as likely be downward as upward. Once the bid was announced, Moody's changed the outlook to "Developing" (meaning -- wait and see), and stated that if the Leverage were to decline to below 3.5 (as would have been under the original $48 offer), Valeant credit rating would improve; whereas if it will go well above 4.0, rating would decline (the $72 offer leaves it around 4.0). Allergan rating is A3 (solid investment grade), with a leverage just above 1.0. Before the announced bid, the outlook was "stable," but was changed to "negative" with the bid to account for the possibility that the takeover will succeed and then all Allergan debt would become Valeant debt with junk status.
Junk Bonds -- A term popularized, and often vilified, during the 1980's boom in takeovers (including many hostile ones). It refers to a debt that is considered to have significant risk of default. To entice lenders to accept Junk Bonds, they offer interest rates significantly above market rates for less risky debt (bond traders prefer to use the term "High Yield" to "Junk" to emphasize the attractive aspect of such debt). A very hard rule in corporate law is that all debt, including "Junk Bonds," must be fully paid with interest, before any shareholder may receive a penny. So, no matter how "junky" the bonds might be, the shares are always "junkier." Valeant debt is rated as "Junk Bond." None of Allergan debt is "Junk." This fact supports Allergan's assertion that Valeant shares are junk.
SEC (Securities and Exchange Commission) -- An agency of the US Federal government responsible for enforcing security laws and the orderly formation of capital. It investigates potential insider trading and accounting fraud. Publicly traded companies, such as Allergan and Valeant, must follow strict rules, overseen by the SEC, with regard to transacting, and disclosing information. The rules require companies to file reports for public availability disclosing, in significant details, their financial statements on quarterly and annual basis (the latter in even greater details). In addition, special events, material new information, legal stock transactions by insiders, and others must be publicly filed (see section on SEC forms). Valeant was able to generate a bid for Allergan, without even talking to Allergan (much like offering to buy someone's house without ever been allowed to see it inside), based entirely on what they were able to read from Allergan's SEC filings. Likewise, much of Allergan's attack on Valeant's business model is based on information available in Valeant's SEC filings. By filing it's Valeant-bashing presentations directly with the SEC, Allergan is making the point that it strongly stands behind those presentations (it would be fraudulent to knowingly file falsehood); and also, may sets the stage for asking the SEC to investigate Valeant (since some assertions made by Allergan arguably border on accusing Valeant of fraud) (or, at least, instill some doubt in shareholders of both companies regarding Valeant's worth).
Roll-up -- A business model that affects a rapid series of acquisitions, with cost-cutting and duplication-elimination (see synergies) as the primary source of value creation. Because accounting rules are designed to treat acquisitions as unique "one-time" events, rather than an ongoing business model in its own right; the financial statements of roll-up companies are always considered complex and conducive to opaque, deceptive, or even fraudulent, reporting. Because acquirers often use their own stocks to pay for acquisitions, as Valeant is offering Allergan, there is every interest to manipulate such financial statements so as to artificially inflate the stock price. Roll-ups are a tiny fraction of all businesses, but account for almost all famously massive securities fraud events outside the financial sector of the last 20 years, including Enron, Tyco, WorldCom, Waste Management, Cendant, and others. Allergan made that point in its investor presentation when it openly compared Valeant to Tyco (whose CEO ended up in prison).
Contingent Value Right (CVR) -- When buyers and sellers have an unbridgeable difference of opinion with regard to the value of an asset, a contingent value right may provide a way to close the gap. The asset is carved out of the rest of the deal and it's value is allowed to surmise separately. Contingent on its future performance, the sellers will receive, in the future, some formula return value. The CVR itself is a security (like a stock) that investors can buy and sell. Allergan investors that Pershing Square and Valeant spoke with, apparently, indicated that they don't think Valeant will be able to nurse the mid-term R&D effort required to bring the potentially huge DARpin drug to commercialization; and that too much value will be destroyed by failing to do so (about $20B). Valeant publicly stated that they don't believe DARpin is that huge, but included a CVR in their latest offer where they will insulate the DARpin team, keep the R&D staff, and then apportion to selling Allergan shareholders a portion of the future DARpin sales. Analysts were unimpressed with the prospect of a carved out team without the overall Allergan R&D infrastructure and think that Valeant would be better off just selling DARpin to an entity that is R&D-enabled.
Leveraged Buy Out (LBO) -- Borrowing money to buy a company, and then paying off the debt using company profits (and potentially asset sales). Many acquisition strategies, friendly, hostile, and (especially) management, rely on LBO. In general, the level of debt required to buy a company outright bring the leverage (see entry) to such a high level that the debt used to make the acquisition is rated as junk bonds (see entry) and thus require high interest payments. LBO acquirers, facing the need to make high regular interest payments, are often forced into cost-cutting or investment-reductions to stay afloat. However, a successful LBO can be extremely lucrative to the buyer since they will end up owning the entire company (after paying off its debt). The Valeant offer to buy Allergan is partially an LBO (the cash portion). A potential management buy out (see entry) counter-play would almost have to be entirely an LBO.
EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) -- An accounting term that tries to measure how much cash the company generates (or will generate) available to pay on it's debt. Earnings, by accounting rules, is computed by subtracting expenses from revenues. However, some expenses do not actually use up any cash (depreciation and amortization), and thus are irrelevant with regard to the company's ability to pay it's debts. Likewise, taxes are only relevant if the company is still making a profit after paying interest, and thus also irrelevant for this purpose. The ratio of debt to EBITDA is a quick guide to how leveraged, or risky, is the company.
Tax Inversion -- The US is the only country in the world that taxes the worldwide earnings of its citizen (including corporate citizens). All other countries tax only the portion of earnings that takes place on their own soil. It is therefore potentially tax-advantageous for a US corporation to re-domicile to another country (and then continue doing business in the US as a foreign corporation). This is the corporate equivalence of renouncing one's US citizenship so as to not have to pay US taxes on foreign earnings. Furthermore, through carefully planned transfer pricing (the fees charged by one part of a company to another), a corporation can arrange to have all it's profits accumulate in a low-tax country. For example, the company can have a "patent owning division" in a low-tax country, and then have that division charge all operating divisions patent license fees that are so high as to make all other divisions unprofitable (and thus pay no local corporate income taxes in whichever countries they operate), while the "patent owning division" accumulate all the profits in it's low tax haven. This is all perfectly legal, but often attracts the scrutiny of tax auditors, who may then disallow various practices (for instance, argue that the patent fees are unjustified). The process of expatriating a US corporation is incredibly complex and expensive (and invokes various "exit taxes"), but is made a lot simpler when a foreign corporation buys a US corporation and the US corporation simply ceases to exist (without ever expatriating). The tax benefits can be so high that sometimes it is worthwhile for a US corporation to buy a foreign company but structure the deal as if it was the foreign company that bought the US one. This process is called Tax Inversion. Valeant, in its present form, was created when a California company (Valeant, formerly ICN) purchased a troubled Canadian firm, Biovail, but structured the transaction as an Inversion (so, technically, Biovail acquired Valeant and selected the latter's name for the surviving corporation). Some of the value creation Valeant claims will accrue through a merger will stem from this inversion process (since Allergan will no longer be a US corporation). Among the potential counterstrategies Allergan is rumored to pursue is to affect a tax inversion of it's own by buying a foreign corporation, for instance Ireland's Shire (and thus eliminate one of the benefits of a Valeant deal). In it's presentation, Allergan warned that Valeant's tax strategies are so complex as to be unmanageable, attract the attention of auditors and regulators, and may collapse altogether when national taxing authorities start cracking down on such techniques and legislators start closing such loopholes.
Important SEC Forms (All forms filed with SEC are publicly available)
(I'm only listing those because often analysts, reporters, and other financial community members mention SEC filings by form number with no further description. There are many more forms, but these are the most relevant ones here).
13D (5% ownership) -- Whenever any shareholder reaches 5% ownership of a company they must file a form 13D with the SEC disclosing their share ownership and intentions. The rules allow 10 days to make the filing and do not forbid additional buying during those 10 days. Ackman famously surprised everyone by rapidly accumulating from 5% to 9.7% during those 10 days (buying at a low price before the bid was announced). Consequently, there have been some calls, to eliminate the "anachronistic" 10-days "loophole."
10K (annual report) -- A report that must be filed by every public company once a year including its annual financial statements, discussion of business, and outlook. For large companies, it must be filed within 60 days of yearend. The report must be audited by an independent CPA.
10Q (quarterly report) -- A shorter version of the 10K annual report filed quarterly, including its quarterly financial statements. For large companies, it must be filed within 40 days of quarter end (unless its the last quarter of the year, in which case it is combined with the annual report). 10Q reports do not need to be audited. The report must include a contrast between the current quarter and the same quarter the prior year to allow investors to judge for themselves if the company is growing or shrinking and other trends of relevance, net of potential seasonality effects. A common criticism of Valeant is that such Year-over-Year comparisons are a near-impossibility because the rapid pace of acquisitions and accounting presentation choices that mask what component of revenues come from newly acquired business and what from previously. It is often noted that subsequent to the B+L purchase, in August 2013, Valeant made no acquisition large enough to distort the numbers significantly; and therefore, absent an Allergan acquisition (or a very large surprise transaction -- acquisition or divestiture -- between now and the end of the September), the 10Q for the 3rd quarter of 2014 (and even more so, the 4th quarter), for the first time in years, will begin to show how well Valeant is growing (or not) when it is not acquiring.
8K (special event) -- Whenever any of a broad spectrum of events that are outside the normal course of business happens, the company must file, within 4 days, an 8K form with the SEC where the event is disclosed and, if appropriate, explained. Example of events that trigger an 8K reporting requirement include the hiring, firing, or departure of a senior officer or board member; issuing material debt or equity; impairments, defaults, changes in corporate structure, change of accounting firm, and so on.
