Glossary of Hostile Takeover Terms with Discussion

My wife is in the same boat. In our case, commuting to Irvine is an option until things resolve out (I already commute to Irvine -- working for another company -- so carpooling is also a possibility). But if you are too far and would need to relocate immediately, this is a tougher decision. My opinions are just opinions; there are some very smart investors betting the other way, and when it comes to uprooting a family; I would think you need to consider and be ready for all possibilities, and delay really major decisions (I wouldn't go around buying a house in Irvine just yet).

Factors to consider:
  • What is the "package" if you accept the layoff now?
  • What are your employment options where you are now?
  • If you have a working spouse/partner, what are their options?
  • Are there kids? How will their lives be disrupted?
  • If Valeant wins, will you keep your job? (They said that they will keep substantially all customer-facing employees, spin off SkinMedica, continue DARPin research; and pretty much lay off everyone else. Their word is hardly golden, but at least it's a starting point)
  • What relocation help will you get?
  • What will your options be if you relocated and ended up laid off afterward?
And, lastly and not leastly:
  • Do you like your job?

[I don't know if this is any help, but it may be useful to organize your thoughts in an impassioned fashion]

Dan.

Thanks, Dan. That does help. I am in the Dermal Fillers business. And the fact that VRX has spun off their Restylane product line gives me a good feeling about them keeping the Juvederm products if they were to take over AGN.

But, I will think this through thoroughly before making a decision.
 




http://finance.yahoo.com/news/delaware-judge-fast-tracks-valeant-154533409.html

DE judge just accepted Valeant's position to fast track the second lawsuit. Seems like between this, and the California case going against AGN too, things are certainly leaning in VRX's direction in the courts. 3 day trial starting on Oct 6 means this will be settled 10/9.

It seems pretty clear VRX and Pershing will win that case, since everyone basically agrees nothing illegal occurred by the letter of the law. So you'd have to assume Ackman will get to vote his shares in the meeting. Highly doubt AGN can find an acquisition, clear it, and close it on that timeline.

looking for Dan's insight, but over the last 3 weeks this thing seems to have gone from a long shot to a more likely than not probability
 




http://finance.yahoo.com/news/delaware-judge-fast-tracks-valeant-154533409.html

DE judge just accepted Valeant's position to fast track the second lawsuit. Seems like between this, and the California case going against AGN too, things are certainly leaning in VRX's direction in the courts. 3 day trial starting on Oct 6 means this will be settled 10/9.

It seems pretty clear VRX and Pershing will win that case, since everyone basically agrees nothing illegal occurred by the letter of the law. So you'd have to assume Ackman will get to vote his shares in the meeting. Highly doubt AGN can find an acquisition, clear it, and close it on that timeline.

looking for Dan's insight, but over the last 3 weeks this thing seems to have gone from a long shot to a more likely than not probability

DE is dealing with by laws / poison pill issues / is proxies were collected per by laws etc

CA is dealing with insider trading issues

it is highly unlikely that shares that are tainted with insider trading acquisitions that are sub judice will be allowed to vote even before CA lawsuit is disposed off
 








http://finance.yahoo.com/news/delaware-judge-fast-tracks-valeant-154533409.html

DE judge just accepted Valeant's position to fast track the second lawsuit. Seems like between this, and the California case going against AGN too, things are certainly leaning in VRX's direction in the courts. 3 day trial starting on Oct 6 means this will be settled 10/9.

It seems pretty clear VRX and Pershing will win that case, since everyone basically agrees nothing illegal occurred by the letter of the law. So you'd have to assume Ackman will get to vote his shares in the meeting. Highly doubt AGN can find an acquisition, clear it, and close it on that timeline.

looking for Dan's insight, but over the last 3 weeks this thing seems to have gone from a long shot to a more likely than not probability

Are Ackman and co. paying off the judges or something? Or is the DE court just generally biased against big corporations? Just seems odd that everything legal has been so heavily against AGN.
 




There are 1.4 bearish puts on Allergan for each call outstanding, close to the highest level since 2008, according to data compiled by Bloomberg. Last week, two-month contracts betting on a decline in the shares reached the most expensive level since 2011, compared with those betting on a gain.

The battle is stretching into a fifth month. Allergan has rejected two takeover proposals, said it may do its own deal to fend off the suitor and filed a lawsuit alleging insider trading between Valeant and hedge-fund manager Ackman, whose Pershing Square Capital Management LP owns 9.4 percent of Allergan shares.

“People were impressed when Ackman took a stake and kind of saw it as an ordained conclusion that he would get Allergan,” Scott Houlihan, a merger arbitrage research analyst at Purchase, New York-based Ota Limited Partnership, said via phone. “I imagine everyone in the arb community underestimated the will of these guys to get away.”
 




Awesome posts and commentary. Thanks Dan!

Since this is mostly speculation here, what your thoughts are regarding the future of Valeant if they were to succeed in acquiring Allergan?
 




Bingo.

I was amused, throughout the day, to read various headlines suggesting Allergan is "Buckeling" or "Giving up." I think this filing, win or lose, makes it clear that Allergan still has plenty of fight in it.

Allergan did select a meeting date (one day prior to the last legally allowable day), but then quickly added that they haven't yet verified the validity of the proxy request; and, just in case anyone thinks this verification is a mere formality, made it quite clear that they don't think PS shares should count (and without those shares, no 25%, and no special meeting).

Allergan asked Federal Judge Carter to issue an injunction against PS from voting or otherwise using his illegally-obtained (according to Allergan) shares and again asked to Expedite the discovery. The injunction is the heavy weapon here. The expedite motion, again, is a sanctimonious pretension that they wouldn't want to hold up the special shareholder meeting in case PS is cleared (when, obviously, they do!). The best Allergan can hope for is that the injunction be granted (knocking PS out of the equation), and the expedite motion is denied (keeping him knocked out, potentially, for years).

As we are on uncharted legal territory, I can't really handicap this play. My best guess is that the expedite will be denied -- I don't see why Judge Carter will think differently this week than he did last week. The big question is if the Injunction will be granted. If it is, this would be a huge, possibly terminal, setback for PS (Valeant may try to press forward, but without PS it would be mighty difficult). More likely, judge Carter will look for a way to temporize (judges love to temporize, particularly in fast moving situations, since whatever they are being asked to rule on may be rendered moot while they temporize; saving them the need to rule, risk being successfully appealed, and created needless precedents). {You can bet that if this happens, PS will file one expedite motion after another while Allergan will oppose every one of them -- with both sides, now having switched roles, using each other's prior language in their filings :)}.

A temporizing ruling would be something like denying both the expedite and injunction, saying that they defer to the DE Chancery Court to interpret Allergan's bylaws, and leaving the door open to return if the Chancery court is unable to proceed appropriately. This is not hugely different from what Judge Carter said last week. The Wall Street Media, with Ackman cheer-leading and Valeant crowing, will declare this as a 3-out-of-3 win over Allergan, but it will be far from it! (Allergan will keep the pretenses up by appearing to put a brave face on the "loss" and meekly pointing out that the judge didn't give a final "no.").

The DE Chancery, which also loves to temporize, will likely toss the ball back to the Federal Court, for instance, by claiming that they are unable to determine the legality of PS shares as they, being a state court, lack jurisdiction to determine if Federal Insider Trading Laws have been violated (never mind that DE Insider Trading laws -- which the Chancery Court does have jurisdiction over -- are effectively identical; but no one [yet] sued PS for violating DE Insider Trading laws).

This potential ping-pong between the two courts would be just great for Allergan, as it will create delays upon delays, through no fault of Allergan. Since I don't see how either court will allow PS to take over Allergan (and shut down the lawsuit -- mooting justice to the victims) without first resolving the Insider Trading accusation, all those delays are to Allergan's benefit.

Ackman may be a prolific litigator, but uncharted legal territory is not the place to find speed.

Dan.

Dan, thanks for all your opinions here. They are thoughtful and helpful. When you have a chance, please let us know your thoughts on implications of October 6th-9th DE hearing on the ability of Allergan to deploy its balance sheet towards an acquisition and how CA insider trading law suit may impact the outcome of the October DE hearing, thanks.
 




  • Shoham   Sep 02, 2014 at 02:49: AM
General Thoughts on the Courtrooms Dramas

Hi everyone:

Since I have a handful of questions regarding the various courtroom decisions -- none thus far on any merits, just on timing issues -- and the sense, in the media and CafePharma, that momentum is with Valeant; I thought I'd try to bring in some perspective.

The first thing to keep in mind is that the courtroom matters are the side show -- in my earlier posts, I referred to these and other side shows as a "soft power" (important, in that they keep the other side distracted, but won't win by themselves). The courts won't stop a deal that the shareholders want. And, even if they stopped this deal cold, what about the next guy who will come along and offer to buy Allergan for more than it's trading share price -- to be likewise financed through the wholesale liquidation of R&D? That next guy will be smarter than to have the shady financial statements of Valeant and possible Insider Trading of PS.

This battle will be won or lost through Hard Powers -- the ability to leverage the balance sheet to the benefit of shareholders. Allergan has a huge advantage over Valeant: The Valeant offer will give Allergan shareholders about $0.44 out of every $1.00 of value creation (since Allergan shareholders will own 44% of the combined company). If Allergan creates as little as half the value Valeant is promising, it will have a better value proposition (the recent restructuring is already about halfway to that target). There are many ways to get there without killing the best R&D: Acquisitions, spin-offs, further restructuring, sale of the company, management buyouts, special dividends, shares buybacks, and so on (some of these only work in combinations with others). My favorite, that no one has yet said a word about, is management buyout; but from the media it would seem that acquisition is the path being most explored.


But, since the courtroom dramas are currently in the headlines, here is my play-by-play take:

The DE Chancery Court: This court is being asked to adjudicate a dispute between shareholders (not all shareholders, or even a majority, to be sure; but 31% is too many to be dismissed) and the board of directors. Ultimately, they have to rule in favor of the shareholders -- the shareholders are, after all, the owners of the company and the Board is the servant of the shareholders. The main argument that the Board can use in this court is that some shareholders (those who do not want the deal), whether they are a majority or a sizable minority, are at risk of being disenfranchised by those who do, by having the deal railroaded upon them before the Board had a chance to find a potentially superior alternative to the Valeant offer. This argument is the justification as to why Poison Pills (see glossary entry) are legal in the first place. The counter argument is that 6-8 months (the time between when the Valeant offer was first publicized and the special meeting), should already enough time for the Board to find alternatives, and any further delay, with no such superior option identified, is for it's own sake and not to the benefit of any shareholder.
I expect that the court will take the view that there is no reasonable justification to keep the shareholders from holding a special meeting -- and let the chips (in such meeting) fall where they may. They might even accept PS argument that the meeting should be hurried (to keep the Board from placing the Valeant offer at risk in the absence of a superior alternative). The court might also rule that any deal (such as an acquisition) that has the effect of pushing Valeant away, should also be voted on by the shareholders (heck, if it's such a great deal, even better than the Valeant offer, the court will agree with PS, the Board shouldn't be afraid to put it to the shareholders to vote). One thing the Chancery Court won't consider is the matter of Insider Trading. That question is in the Federal Court, and until there is a ruling in that matter to the contrary, the DE court will consider all of Ackman's shares kosher. (However, any decision by the Federal Court to neutralize Ackman's shares will be respected by the DE Chancery Court -- likely shifting the balance of power drastically).

The Federal Court: This is where Allergan will get a friendlier audience. By agreeing to take the case and by using language such as "serious allegation," the court is implying that they see some meat to the Insider Trading claim. As this is unexplored legal territory, I won't handicap their merit decision; just mechanics. This court will try, for as long as possible, to find excuses not to make any decision (or even work on an expedited basis), because it would not want to set precedents (what you inevitably do when working in uncharted legal territory) and risk being overruled on appeal. The Federal court, with each expedition denial, will re-invite Allergan to come back if further steps are taken toward PS gaining control of the company. As far as the Federal Court, if it really wants to max out the temporizing game, is concerned; scheduling, and even holding, the Special Meeting are all reversible steps (they can, even retroactively, declare PS shares not to count in any vote -- even after the vote is held). The eventuality that would most motivate it to rule, would be the possibility that PS will gain control of the Board and moot justice to the victims (by stopping the suit) without having first been cleared. If the Federal court hits PS with any sort of injunctions at any prior step, then that would be an indication that they are leaning in the direction of ruling for Allergan on the merits.

The bottom line: I think Allergan Board and management need to make their Hard Power move now. Time is beginning to run short!

Dan.
 




  • Shoham   Sep 02, 2014 at 03:35: AM
Awesome posts and commentary. Thanks Dan!

Since this is mostly speculation here, what your thoughts are regarding the future of Valeant if they were to succeed in acquiring Allergan?

Valeant shares are doomed, but the company will still have a smidgen of life.

The acquisitions they made can not pay for themselves. Too much value was destroyed in the process. While there is enough value left in the acquired companies to pay off the debt holders (the lenders have been very careful to lend no more than Valeant can pay off), the shareholders will be left with pennies on the dollar for their investment.

If Valeant stopped acquiring now, and simply started paying off their debt from existing business profits, they will, just barely, be able to pay their debt down slightly faster than the rate of decline in the business. But with no financial resources available to making any investments (in either R&D or market development), by the time Valeant finishes paying the debt down, what will be left of their book of business will be a shadow of it's current self, and, correspondingly, their share value will be a fraction of today's valuation.

The original offer for Allergan (with $48 cash) had the opportunity to give Valeant a bit of breathing room. With the deal, Valeant would have been a bit more credit worthy than it is now (since it would be adding more revenues than debt load). Under the hypothetical scenario where Allergan accepted the initial Valeant offer and then Valeant stopped acquiring any further; the same debt pay down process would have left Valeant in a financially better shape than the no-more-acquisitions scenario described above. The post-debt-pay-down Valeant share would still be worth a fraction of today's stratospheric valuation (relative to earnings and debt load), but a bigger fraction.

Under the current offer for Allergan (with $72 cash), Valeant is essentially back in the same boat it is currently: With both earnings and debt load higher, but maintaining their present edge-of-the-abyss ratio.

As it is hard to see how Valeant can make another acquisition that will dwarf this one (like this one dwarfs B+L, B+L dwarfed Medici, and Medici dwarfed all the prior ones) -- there just aren't that many companies that dwarf Allergan -- it is fair to assume that this would be the last material acquisition. Whether MP likes it or not, after Allergan (or, for that matter, after failing to acquire Allergan and realizing that there are no easy $50B targets available), the future of Valeant is to start unwinding it's debt. This will either be through methodical pay down, controlled spin outs, or chaotic bankruptcy proceedings.

Dan.
 




Thanks Dan. Help us envision what it would look like if The DE court expedites the meeting or forces shareholders to vote on a potential acquisition.

Does the court have the authority, and is it likely to, effectively overrun a company's bylaws by making them force meetings sooner etc. is this the outcome Valeant is hoping for or is that a Hail Mary part of a broader case to simply say the meeting must happen.

Thanks
 




  • Shoham   Sep 03, 2014 at 01:37: AM
Thanks Dan. Help us envision what it would look like if The DE court expedites the meeting or forces shareholders to vote on a potential acquisition.

Does the court have the authority, and is it likely to, effectively overrun a company's bylaws by making them force meetings sooner etc. is this the outcome Valeant is hoping for or is that a Hail Mary part of a broader case to simply say the meeting must happen.

Thanks

The DE court has near total authority with regards to corporate governance. It generally chooses to exercise this power sparingly, but if the judge feels that a board is entrenched and is disregarding the shareholders, it may choose to be more proactive. Forcing the meeting sooner is a distinct possibility -- but by no means a forgone conclusion. Valeant is hoping for anything that will speed things up, every day that passes their case weakens and Allergan's options grow.

Dan.
 




The big question... is can the court do what Valeant is asking, keep Allergan from spending its billions to buy someone else before the special meeting? Seems like a pipe-dream for Valeant to even ask this of the courts... but would be nice to hear from anyone who knows if this has ever been done before?
 




  • Shoham   Sep 03, 2014 at 09:57: AM
The big question... is can the court do what Valeant is asking, keep Allergan from spending its billions to buy someone else before the special meeting? Seems like a pipe-dream for Valeant to even ask this of the courts... but would be nice to hear from anyone who knows if this has ever been done before?

Valeant, no; it has no standing to dictate anything to Allergan -- making a bid for someone doesn't give you a right to tell them how to run their business and have the courts enforce it.

PS, is another matter -- it's a major shareholder. Ackman stated that if Allergan tries to make a major acquisition he'll sue. However, this was before he was himself sued (and SEC-investigated) for Insider Trading, where his defense is that he is a co-bidder. If he is a co-bidder, he is in the same boat as Valeant. Maybe he can find some creative legal gymnastics that somehow makes him both (we are in uncharted legal territory, as I do not tire of saying), but the courts would want to clear that before giving him any rights to interfere with Allergan's business.

While a judge can block a defensive transaction, it's a high barrier. Unless proven to the contrary, Boards operating within the Bylaws are presumed to act in the best interest of shareholders, and a judge would loath to substitute their own judgement for that of the Board. Whether Ackman can prove to the DE courts that this Board is no longer acting in the interest of the shareholders remains to be seen. So far, twice, he was able to convince the court that there was need for expediting; but there has yet to be any rulings on the merits of any issue.

Dan.
 




Thanks Dan

If Allergan stated that shareholders of record on OCT 27th would be the ones to vote at the meeting, then is it fair to say "hard powers" will be exhausted before then to try to drive the arbs, etc out of a voting position? Should Allergan be expediting the use of said hard powers to before the Oct court hearing?

Also, unclear if the special meeting is to replace or "remove" directors. Is it a foregone conclusion that PS slate would be in if others were out or is could a new set of directos come in that is not PS's? If a new set what would be the timing and who would nominate them?
 




  • Shoham   Sep 04, 2014 at 01:48: AM
Thanks Dan

If Allergan stated that shareholders of record on OCT 27th would be the ones to vote at the meeting, then is it fair to say "hard powers" will be exhausted before then to try to drive the arbs, etc out of a voting position? Should Allergan be expediting the use of said hard powers to before the Oct court hearing?

Also, unclear if the special meeting is to replace or "remove" directors. Is it a foregone conclusion that PS slate would be in if others were out or is could a new set of directos come in that is not PS's? If a new set what would be the timing and who would nominate them?

The date of record is not particularly meaningful. It's just bookkeeping mechanics. In practice, except for very unusual transactions, whenever someone sells a share, the right to vote the share is sold along with the share. Ownership at the time of the vote (which is the date of special meeting) is what counts. The proxy mechanisms, deep in the back offices of the brokerage firms, assure that the contemporaneous owners are the ones actually voting.

I think Allergan needs to make their hard power move now. The closer we get to the Special Meeting, the more likely a judge will rule that the move, whatever it is, should not be used to prejudge the outcome of the meeting without a shareholder vote.

The Special Meeting can only remove, not appoint, directors. The remaining directors, if they wish, can go ahead and immediately re-appoint the removed directors (sounds silly, I know). Only the Chancery Court can, and may well do, force the Board to appoint the Ackman slate. Normally, I would have said that there is a bit of a delay tactic opportunity at that point; but this judge seems to be very quick to approve expedite requests from Ackman, so I don't think there is much delay available here.

Dan.
 








Dan,

Since they are very close now, what happens if shareholder meeting requests go
over 34.7% making Ackman's shares unnecessary? Other consequences?

Am surprised Pyott hasnt made a purchase yet - he has been looking since January.
What is the time window to still make an acquisition w/out shareholder approval?

Appreciate your help
 




Hi Dan,

One issue that is not being covered by any analyst is the ability of Allergan to raise cash due to its strong balance sheet and excellent debt ratings for distributing cash as special dividend. This move in itself will make Valeant walk away as their intention is to utilize Allergan's strong cash flows. If majority of future cash flows will be locked in servicing debt then Allergan no longer remains attractive to Valeant.

In current environment, if any strategic acquisition is not coming to fruition then are there any hurdles in Allergan by laws in declaring special dividend? I would think this situation begs the classic dividend recapitalization response.

Thank You
 




Hello Dan Thanks for you insightful replies. My question is regarding most favorable outcomes for PS from the Dec 18th meeting.

Even if the BoD was voted out on Dec 18th, doesn't DP have authority to put in place his BoD till next AGM?

Thanks