Glossary of Hostile Takeover Terms with Discussion

[Anonymous]

hey Dan do you or your wife know any Allergan employees at the BW NJ office? We have tons of jobs at Valeant RD.

You are right, Valeant desperately needs to hire more people in scientific roles. Then maybe they could devote more attention to quality control and testing, and locate that source of microbial contamination in their recently recalled batch of Virazole, an alarming and potentially life-threatening disaster if administered to vulnerable hospitalized infants.

I fear, however, most of Pearson's discretionary budget is instead being directed to purchasing more ad spots for Jublia on Fox News and AOL...

 

[Anonymous]

If I needed people to sit around and do nothing I'd hire the morons at Allergan. How's first gen Darpin coming along? Good thing ACT didn't look too closely at that great project.

 

[Anonymous]

Re: Quick Update

With the FTC giving ok to the Allergan-Actavis merger, one element of risk against the transaction has been removed. I never thought it was much of a risk to begin with, but apparently the market did. The deal premium went down from about $13 yesterday (it has been in the $13-18 range since the deal was announced) to just under $10. I still think it's high for a deal with no known enemies, but at least it is starting to close.

Dan,
With this news when do you expect the deal to close? Is it typically kept secret until announced?
Also from your previous posts, you expect arbs to push down Act price to get the deal
to 219? So Act gets pushed down based on AGNs price to make the deal =219, is that right?
-I have seen recent purchases of AGN shares in after markets that were huge
(tens of million $ worth) and purchases of large blocks of ACT bought at higher than ask.
Weird.
Whaddaya think? Thanks

 

[Shoham]

Re: Quick Update

With the FTC giving ok to the Allergan-Actavis merger, one element of risk against the transaction has been removed. I never thought it was much of a risk to begin with, but apparently the market did. The deal premium went down from about $13 yesterday (it has been in the $13-18 range since the deal was announced) to just under $10. I still think it's high for a deal with no known enemies, but at least it is starting to close.

Dan,
With this news when do you expect the deal to close?
Is it typically kept secret until announced?
Also from your previous posts, you expect arbs to push down Act price to get the deal to 219? So Act gets pushed down based on AGNs price to make the deal =219, is that right?
-I have seen recent purchases of AGN shares in after markets that were huge (tens of million $ worth) and purchases of large blocks of ACT bought at higher than ask.
Weird.
Whaddaya think? Thanks

Hello:

Q: When deal will close?
A: I think the original announcement "anticipated to close in the second quarter of 2015" should still be considered the last word on this question (source: http://finance.yahoo.com/news/actavis-acquire-allergan-create-top-141500846.html)

Q: Will it be kept a secret until announced?
A: All material information in a publicly traded company is kept secret until announced. However, don't expect any surprises. As the various mechanics of making the transaction close -- approval by various regulators, securing financing, shareholder votes, etc. -- are completed, each will be announced and publicized; so, when the last bit of mechanics is cleared out of the way, there would be very little surprising about either the eventuality or timing. If anything goes seriously wrong, that would be a surprise (I don't think anything will go wrong, but the market is still putting up a decent premium, so maybe they know something I don't).

Q: Do you expect arbs to push down Act price to get the deal to 219?
A: I want to be very clear about the $219 figure. This figure was meaningful for all of 7 hours (from when the announcement was made -- around 2:15AM EST on Monday, November 17, 2014 -- until the market opened at 9:30AM that same morning. After that, the $219 figure became completely meaningless. The relevant figure (formula, actually), is "$129.22 in cash and 0.3683 Actavis shares for each share of Allergan common stock." The origin of the $219 figure is that the last closing price for ACT prior to the deal announcement -- which would have been on Friday, November 14, 2014 -- was $244. At that price, the formula computes to $219 ( = $129 + 0.3682 * $244). However, as soon as the market opened on that Monday, ACT price started changing, and with it the value of the deal. Today (1/13/2015) closing price for ACT is $270. Therefore, today, the deal is valued at $229 ( = $129 + 0.3683 * $270 ). Since the deal hasn't closed yet, AGN is still trading separately. Today AGN closed at $219 (no relation to the $219 of the original announcement ). The difference between the deal value and AGN trading value is the deal premium. It is currently $10 ( = $229 - $219). The deal premium is effectively a meter of what the market thinks is the likelihood of the deal breaking (and, if it does, what will the alternatives be). If the market considers the deal a near certainty, they would push the premium down to a tiny number (say $1-2). Any Arb who think like I do (that the deal is a near-certainty), could simply buy a ton of Allergan shares, short a number of ACT shares that is equal to how many shares they will be getting on deal closing day (0.3682 * number of AGN shares they got), and then just wait for the deal to close. When it does, use the ACT shares received for the AGN shares to exactly cover the short position, and walk away with a $10 profit regardless what AGN and ACT shares will be doing in the meantime or how long it will take the deal to close. This is what Arbs do for a living -- they find premium opportunities and lock in their profits. Whenever an Arb will do this, they will push AGN shares up (by buying a ton), and ACT shares down (by shorting a ton); thus reducing the premium. The Arbs will continue doing so until the premium became very small and no longer worth playing against. The only thing that could go wrong for such an Arb is if the deal were to break, AGN share price were to tank, and they would lose a lot of money. The fact that the premium is at $10 (and not $1-2) means that the market believes that there is still some real risk to this deal -- but not as much as it was before the FTC approval came, and the premium was in the $13-18 range.

Q: Is it weird to see large share transactions happening above the Ask Price?
A: Not at all. There are many "ask" prices at any given point in time (while the market is open), each with an associated finite number of shares. Casual market reporting services only report the lowest "ask" price, because that is what you will be paying if you buy a small number of shares. Sophisticated trading tools report reports the other "ask" prices as well, and the number of shares associated with each "ask." When a large "buy" transaction is executed, the buyer will completely empty out the seller(s) with the lowest "ask" price, then the seller(s) with the next lowest "ask" price (meaning, at a slightly higher price), and so on; until they got all the shares they requested. Consequently, the composite price they would be paying would be higher than the reported (and lowest) "ask" price. By emptying out all the lower-priced "asks," they would be pushing the trade price upward (which is exactly what a large "buy" transaction is supposed to do). The next "ask" to be reported after such a transaction would be the lowest "ask" not yet (fully) satisfied, which would be higher than beforehand.

Hope this is all clear!

Dan.

 

[Anonymous]

Dan,

Thanks for your answer. Learned alot as usual. Looks like deal premium just went to
$5 today. Best to you..

 

[Shoham]

Dan,

Thanks for your answer. Learned alot as usual. Looks like deal premium just went to
$5 today. Best to you..

Hi.

By my math, as of market close earlier today (1/14/2015), the premium is still around $10. AGN closed at $217, ACT closed at $266, and the deal value is $227 ( = $129 + 0.3683 * $266 ). This makes for a Premium of $10 ( = $227 - $217 ).

There are some funny trading numbers in after-market transactions (maybe that's where you got the $5), but these are thinly traded markets and usually do not mean much. Sometimes a single $1000 transaction can move the after-hour market pricing by multiple dollars (implying, if taken seriously, a market cap change in the billions). If there is some hugely important piece of after-hour news (there is none I'm aware of today), then sometimes the after-market trades can give an early indication of how the market is taking the news; but otherwise, it's basically meaningless and should simply be ignored. After-hour trade prices generally are not factored into any of the regularly compiled market statistics.

Dan.

 

[Anonymous]

Pyott is soon to join the Actavis board of directors (from Reuters). (And as expected).

 

[Anonymous]

Re: The Beginning of the Endgame

This is excerpted from Dan's post # 381:
[/QUOTE]... But enough about the downside. There is also an upside, which, for most employees, I believe, will outweigh the negatives. The upside comes from understanding the type of company that is being created. It will be a top-10 Pharma company, itself a prestigious labeling; but, more importantly, it will be in the Growth Pharma category. What is this Growth Pharma category, and who is in it right now, you might ask? Well, no one actually. It's a newly created category. The Allergan-Actavis combination will be it's first member. Growth Pharma, if I can try to formulate a definition for a category that has only one, future, member, is the category of pharmaceutical companies that have the scale and breadth to do deep R&D, product development, approval, marketing, branded products, durable products, and generic drugs; and is able to keep the R&D pipeline hot enough to generate double-digit top-line growth into the indefinite future. No one does this today. We have biotech categories, we have generic categories, we have branded categories, and so on; but nothing that remotely resembles this Growth Pharma concept.

If it works, then the name of the combined company (whatever that name will turn out to be) will be the hottest name in the industry, and introducing yourself as an employee (or, in some future point, listing it on your resume) will command immediate attention. If it doesn't work, but still makes a lot of waves and shakes the industry, it will still raise the cachet of anyone associated with it. Of course, this whole idea could be a huge flop (always a possibility when a new category is created); and then we just hope that there enough smart people at the top to steer the ship toward a more tried-and-true business model. Will it work? I guess we will find out. However, the market was perfectly happy to bid up the value of the two companies by tens of billions in a few days betting that it will work!
...Dan.[/QUOTE]
~~~
Dan! Did you coin the term "Growth Pharma"? Because if you did, it's just been adopted as a term to describe the Actavis/Allergan combination.
~~~
Re:Hungry Actavis pauses to digest Allergan
January 21, 2015
David Crow in San Francisco

....Mr Saunders says the group is in dialogue with “dozens” of potential targets “all the time” and that it will continue doing small and medium-sized deals in five therapeutic areas: dermatology, ophthalmology, the central nervous system, women’s health and gastrointestinal.

The combined company will be run as a “growth pharma” group — investing in R&D rather than just “managing its portfolio for earnings” by sweating existing drugs.

~~~

Dan, as a former Allergan R&D person, thank you for all your wise, well thought out words. You have been a font of knowledge and reason though-out this whole ordeal. If I may, I would like to reference your entire post # 381 to current R&D people who are still feeling unsettled by the current situation and who may be suffering from some PTSD and survivors guilt from the fallout. Your well thought out reasoning could serve as some comfort.
Please keep posting!

 

[Anonymous]

Quote from the article " Hungry Actavis pauses to digest Allergan
January 21, 2015
David Crow in San Francisco

"The combined company will be run as a “growth pharma” group — investing in R&D rather than just “managing its portfolio for earnings” by sweating existing drugs."

Dan's quote in his post #381:

Hi everyone.

So, the Hard Power play is finally here!
...But enough about the downside. There is also an upside, which, for most employees, I believe, will outweigh the negatives. The upside comes from understanding the type of company that is being created. It will be a top-10 Pharma company, itself a prestigious labeling; but, more importantly, it will be in the Growth Pharma category. What is this Growth Pharma category, and who is in it right now, you might ask? Well, no one actually. It's a newly created category. The Allergan-Actavis combination will be it's first member. Growth Pharma, if I can try to formulate a definition for a category that has only one, future, member, is the category of pharmaceutical companies that have the scale and breadth to do deep R&D, product development, approval, marketing, branded products, durable products, and generic drugs; and is able to keep the R&D pipeline hot enough to generate double-digit top-line growth into the indefinite future. No one does this today. We have biotech categories, we have generic categories, we have branded categories, and so on; but nothing that remotely resembles this Growth Pharma concept.

If it works, then the name of the combined company (whatever that name will turn out to be) will be the hottest name in the industry, and introducing yourself as an employee (or, in some future point, listing it on your resume) will command immediate attention. If it doesn't work, but still makes a lot of waves and shakes the industry, it will still raise the cachet of anyone associated with it. Of course, this whole idea could be a huge flop (always a possibility when a new category is created); and then we just hope that there enough smart people at the top to steer the ship toward a more tried-and-true business model. Will it work? I guess we will find out. However, the market was perfectly happy to bid up the value of the two companies by tens of billions in a few days betting that it will work!...

Growth Pharma it is!

 

[Anonymous]

Oh, and Dan, you are a genius! Thanks for sharing your insights.

 

[Anonymous]

Pearson says he admits miscalculation in Allergan pursuit:

"Part of our thesis was that no one else would come in, and we were wrong"

- Mike Pearson

Quite logical. I mean, who else would want to buy a pharmaceutical company so bloated that it had it's own golf course?

 

[Shoham]

Re: The Beginning of the Endgame

~~~
Dan! Did you coin the term "Growth Pharma"? Because if you did, it's just been adopted as a term to describe the Actavis/Allergan combination.
~~~

Thanks, it would have been super-cool, wouldn't it? But, no, sorry, I didn't coin the term. It was used by Brent Saunders in the investor presentation on the acquisition day (and, I'm sure, many times since and elsewhere). Here is the quote: "We will create a new category in the pharmaceutical industry – “Growth Pharma” – defined by robust and sustainable revenue and earnings growth."
Source: http://www.ourwinningway.com/2014/1...aceutical-company-with-23-billion-in-revenue/

While the Wall Street media was mostly focused, on that day, on the parameters of the acquisition deal ("$219/share price," "$66B valuation," "$140B Market Cap," "$1.8B Synergy," etc.), I was more attentive to the details that were provided regarding what kind of company the acquisition was supposed to be creating. While the definition (above) provided by Saunders didn't seem to have much meat (come on, what company doesn't refer to itself as "defined by robust and sustainable revenue and earnings growth.?"), from the overall context of the presentation I endeavored to formulate a more substantive definition to capture as much as I could of my understanding of the story.

So, again, no, I didn't coin the term; I just described it in a bit more details than the primary sources provided. Still, it is gratifying to see that the explanation I provided two months ago is in synch with what Saunders is telling the media now.

Dan.

 

[Shoham]

Pearson says he admits miscalculation in Allergan pursuit:

"Part of our thesis was that no one else would come in, and we were wrong"

- Mike Pearson

Quite logical. I mean, who else would want to buy a pharmaceutical company so bloated that it had it's own golf course?

Cute.

I was actually quite amused when I read that article. So after all those self-assured statements, and trashing the Allergan management and Board, he basically admits the whole adventure was a mistake. I couldn't help thinking that if he had only been reading my posts...

Dan.

 

[Anonymous]

The article being referred to is published by the Financial Times, 21 Jan 2015, from an interview by reporter David Crow with Pearson during last week's JP Morgan Healthcare Conference in San Francisco. A good read.

Pearson has been left backpedaling many of the positions he has made as CEO of Valeant, such as his callous treatment of employees and his infamous cheapskate ways. Now he gives interviews stressing how he feels for his employees, how he actually believes in innovation and research. And where before his preferred method was to buy a company in expedited fashion, now future targets are on alert that the offer they have been given is likely to be severely low ball.

David Crow also did a joint interview with Pyott and Saunders at the same meeting, and it is also published (updated) 21 January in the Financial Times, "Hungry Actavis pauses to digest Allergan". Full of great quotes from Pyott.

 

[Anonymous]

Check out this interesting article on SA...

http://m.seekingalpha.com/article/2841866?source=ansh $ACT, $VRX, $AGN

 

[Shoham]

Hi everyone:

Just a quick update.

With more mechanics steps toward the closing of the Actavis deal happening as expected, the deal premium is declining. It is now down to about $6 (ACT is trading for $285, making the value of the deal $129+.37*$285=$234; AGN is trading for $228, so the premium is $234-$228=$6).

This is a much more reasonable number than the $13-$18 range the premium was in the first month after the announcement. (I still think it's a bit high, but no longer insane).

BTW, VRX closed over $160 today (for the first time ever, I think). I guess my expectation that their stock price will crush if they lose the AGN deal didn't pan out (at least not yet). I still don't see what their shareholders think is worth $54B (their current market cap), but as long as they keep it to themselves, I suppose it won't hurt to wish them luck. Incidentally, at their last offer (counting the $15 raise they promised but never formalized), their defunct offer would be worth, at today's closing price, $219 -- the same value as the ACT offer when the deal was signed (Of course, as noted above, if we use today's price, then the ACT offer is now worth $234). (Also, of course, the $160 is the price investor gave VRX after it announced that it is going to stop acquiring for the time being; when they were trying to acquire AGN, their share price was mostly in the $110-$130 range).



Dan.

 

[Anonymous]

Hi Dan,

just wanted to get your comments regarding a potential takeover by Pfizer of the combined Actavis-Allergan entity.

The AA integration is currently happening on a generic-branded products dual track. this would fit in nicely with the Pfizer structure of GEP ( mature products) - GIP( branded patented products) portfolio.

Pfizer just took over Hospira to bolster the GEP franchise. Now the branded and non branded portfolio are better matched in terms of weightage. AA combined will also have a nice balance and should facilitate the merger later on while maintain two parallel well matched portfolios ( mature generic/OTC and Branded pipetted product portfolio).

Pfizer just did a 5 B $ share buy back yesterday. Is this to bolster the shock price which can then be used as a weapon in case of a stock-cash deal.

For me everything is pointing towards a prospective merger/ takeover bid later in the year once the Allergan Actavis integration is completed.

What do you think??

Cheers.

 

[Shoham]

Hi Dan,

just wanted to get your comments regarding a potential takeover by Pfizer of the combined Actavis-Allergan entity.

The AA integration is currently happening on a generic-branded products dual track. this would fit in nicely with the Pfizer structure of GEP ( mature products) - GIP( branded patented products) portfolio.

Pfizer just took over Hospira to bolster the GEP franchise. Now the branded and non branded portfolio are better matched in terms of weightage. AA combined will also have a nice balance and should facilitate the merger later on while maintain two parallel well matched portfolios ( mature generic/OTC and Branded pipetted product portfolio).

Pfizer just did a 5 B $ share buy back yesterday. Is this to bolster the shock price which can then be used as a weapon in case of a stock-cash deal.

For me everything is pointing towards a prospective merger/ takeover bid later in the year once the Allergan Actavis integration is completed.

What do you think??

Cheers.

Hello:

I'm on vacation in South America, without access to my usual technology, so here is a quick response; apologies if I sound curt.

I addressed this question in post #375 (posted some hours before the Actavis deal was announced), repeated here:

There is no legal upper limit for the size of an inversion deal acquisition (only a lower limit -- the foreign company can't be smaller than about 1/4 the US one), but there are other issues with this kind of size.

Pfizer has an Enterprise Value of about $195B. (Enterprise Value = Market Cap + Debt - Cash; for Pfizer, that's $191B+$4B). Actavis has an EV of $80B ($65B+$15B) and Allergan, at purchase price of, say, $215, will have an EV of $63B ($65B - $2B). While we don't yet know the cash/stock mix of the deal (and therefore, how much debt will be incurred, and how many shares issued) to be able to compute eventual market cap; the EV of the combined Allergan-Actavis company will equal the sum of the EV of the two components -- or about $143B.

If Pfizer, or anyone, were to buy this combined company, they would be paying a control premium of, say, another ~$40B (depending on the debt/equity mix), for a total purchase price (including assumed debt) of about $183B. The EV of the final Pfizer-Actavis-Allergan combination would then be about $378B. That's a very big number (no kidding, Sherlock!). Only three companies (Apple, GE, and Exxon) have a higher EV ($680B, $630B, and $420B, respectively) and only a handful of companies have EV in the $300B's (Berkshire: $364B, Microsoft: $344B, Google: $320B, and Walmart: $317B -- did I miss any?). This top-of-the-food-chain zone creates a long list of issues not seen at the next level. To begin with, it's almost impossible to get regulatory approval for any merger that will create a company that size (unless it is to prevent a bankruptcy -- in which case regulators are a lot more accommodating). Said approval will need to be gotten from a long list of regulatory agencies in multiple countries, each of which wants to make it clear they make their own decisions and aren't cowed by anyone else. (The failed AstraZeneca bid by Pfizer would have formed a company with EV just under $300B, and it ran into more problems than Pfizer was willing to deal with). If Pfizer really wants to invert, they will find themselves a nice ~$50-70B partner (like Actavis before this deal), rather than try to swallow anything too big.

So, bottom line: Nothing is impossible, but being gobbled up by Pfizer isn't something I'd be too worried about right now.

Dan.

PS: I am holding off commenting on the Actavis news until we have some announcement with definitive details; but I try to answer questions as soon as I have a chance.

My opinion on the matter hasn't changed since: Nothing is impossible, but I don't think this one is in the cards.

As for the share buyback, I normally would interpret that as counter-indicative of acquisition appetite. It takes cash (or borrowing power) off the table by passing it to shareholders. Not what you do if you are on the prowl and would want as big a (cash) "war chest" as possible. When I see a share buyback (or bond pay-down) after a big acquisition, my first instinct is to consider it as excess cash left afterward (the "war chest" was bigger than the acquisition, so the left over is being returned to the shareholders or bondholders). Note that when Valeant lost the Allergan bid and decided they are off big acquisitions for a while, they immediately did a bond paydown too. I say "counter-indicative," but note that this is a very reversible move. If a company that did a buyback (or paydown) wants to re-liberate the buyback cash, all they need to do is sell back the bought-back stocks through the open market or a special offering (or re-borrow the paid-down debt). (There are many costs and inefficiencies of going back and forth this way -- so it shouldn't be treated like a bank account where you can make deposits and withdrawals at will).

Dan.

PS: I noted that we just became the first Allergan thread to cross 100K hits. What can I say? I'm a bit overwhelmed and can not begin to express my appreciation to the readership that gave me as much support as I tried to give everyone here. Thanks everyone!

 

[Anonymous]

Dan.... Your our man! Brilliant! Thank YOU!

 

[Anonymous]

If a company that did a buyback (or paydown) wants to re-liberate the buyback cash, all they need to do is sell back the bought-back stocks through the open market or a special offering (or re-borrow the paid-down debt). (There are many costs and inefficiencies of going back and forth this way -- so it shouldn't be treated like a bank account where you can make deposits and withdrawals at will).

Dan.

This is also what Valeant has done/is doing. As soon as they paid back one half-billion $ debt (right after the Allergan takeover failure), Valeant immediately began shopping for more acquisitions and also put up a new offering (again, around a half-billion $)of their debt for bond purchasers. I like how you have pointed out "costs and inefficiencies...treated like a bank account, etc.". I also think that is part of how Valeant obscures its finances, by coninuously moving money around in a giant pharma shell game.