Glossary of Hostile Takeover Terms with Discussion

[P551]

Seriously? Just like the infamous "snow day" dinner between Paul Bisarp and BS? Happened like magic. And i am Barney, the pink dinasour. 551 you know better

Looks are obvious and perception matters for an individual opinion but the point I was making was that there is no credible evidence. Someone show me a direct connection. The SEC is not going to act on heresay. You all know this so before stating the obvious go out and find real, documented proof. These guys are likely too smart for there to be a smoking gun. I'll wait to see the proof instead of adopting the NFL more likely than not strategy.

P551

 

[P551]

Looks are obvious and perception matters for an individual opinion but the point I was making was that there is no credible evidence. Someone show me a direct connection. The SEC is not going to act on heresay. You all know this so before stating the obvious go out and find real, documented proof. These guys are likely too smart for there to be a smoking gun. I'll wait to see the proof instead of adopting the NFL more likely than not strategy.

P551

The predicted share buyback was announced today and will start to be effective tomorrow. This will close the gap on the deal and reduce the premium. We still need to wait for time to pass however.

P551

 

[anonymous]

The predicted share buyback was announced today and will start to be effective tomorrow. This will close the gap on the deal and reduce the premium. We still need to wait for time to pass however.

P551

Thanks 551, I had not seen that.

 

[anonymous]

The predicted share buyback was announced today and will start to be effective tomorrow. This will close the gap on the deal and reduce the premium. We still need to wait for time to pass however.

P551

The share buy back by Pfizer was done to ease the tax burden of heavily invested investors, employees according to published reports. How will this affect anything with the deal? PFE movement was very little today likewise AGN!

 

[anonymous]

The share buy back by Pfizer was done to ease the tax burden of heavily invested investors, employees according to published reports. How will this affect anything with the deal? PFE movement was very little today likewise AGN!

Will boost the share price. Agreed it was done for selfish internal reasons but the entire stock market is built on bogus share buy backs and we keep falling for it.

 

[anonymous]

agreed, simple pandering

 

[anonymous]

agreed, simple pandering

Definitely

 

[anonymous]

Valeant is tasting a bit of karma this morning. Sad that Allergan employees got destroyed in the process.

 

[anonymous]

Valeant is tasting a bit of karma this morning. Sad that Allergan employees got destroyed in the process.

And sad that Valeant employees may be casualties at some point as well. The Mgmt and Ackman deserve everything coming their way - same with the other hedgies who remorselessly propped up the POS.

 

[Shoham]

... Yes the markets continue to speak in terms of the premium, but it's interesting to me that nobody has articulated any reasons (tangible that is) for the deal not happening...

P551

Ok, I'll articulate:

Merger deals, particularly all-shares "merger-of-equal"s, have a significant failure rate, and famously spectacular implosions (Time-Warner-AOL, Chrysler-Mercedes) are famous for damaging some of the highest market cap companies in history. Many things can go wrong with a merger: Integration risks, loss of valuable individuals, lack of experience in each others' business, outright fraud, loss of customers, etc. Also, the buyer never really knows if the seller has artificially inflated metrics or engaged in unsustainable practices leading to the merger (long-time readers of this thread remember what happened with Salix). A commonly sited figure is that 70-90% of mergers fail. (See Harvard Business Review: https://hbr.org/2011/03/the-big-idea-the-new-ma-playbook).

To offset this failure rate, for any credible merger, there has to be significant value creation: Because there is some substantial probability that the combination will be worth less than the sum of the parts, there must be an offsetting probability that it will be worth a lot more.

This has nothing to do with share price, or premium, or shareholder votes, or deal parameters, or if it's cash or stock, or debt, or any financing consideration; it is just the simple question of whether the two businesses can make more money operating separately or merged.

The proponents will focus on the merger's value creation. They don't go around saying that, historically, X% of mergers failed. The investors already know that bit. If the value creation they articulate is not convincingly high enough to offset the failure risk, the shareholders of at least one company would be better off keeping their company independent and will be disposed to vote against the merger.

In this instance, the value creation is very limited and entirely based on (possibly unsustainable) tax inversion savings. The premium is broadcasting that the shareholders are unconvinced, and expect enough of their peers to be voting against it.

(BTW, there has been some posting making a connection between Pfizer share buybacks and the merger premium. There is no connection. Yes, every dollar used in a buyback reduces the number of outstanding Pfizer shares and therefore increases the percentage Allergan shareholders will own in the eventual merged company; but it also reduces the value of that company by exactly the same dollar. So the effect is a perfect wash.)

(I'll crow a bit about Valeant after the market closes).

Dan.

 

[anonymous]

Ok, I'll articulate:

Merger deals, particularly all-shares "merger-of-equal"s, have a significant failure rate, and famously spectacular implosions (Time-Warner-AOL, Chrysler-Mercedes) are famous for damaging some of the highest market cap companies in history. Many things can go wrong with a merger: Integration risks, loss of valuable individuals, lack of experience in each others' business, outright fraud, loss of customers, etc. Also, the buyer never really knows if the seller has artificially inflated metrics or engaged in unsustainable practices leading to the merger (long-time readers of this thread remember what happened with Salix). A commonly sited figure is that 70-90% of mergers fail. (See Harvard Business Review: https://hbr.org/2011/03/the-big-idea-the-new-ma-playbook).

To offset this failure rate, for any credible merger, there has to be significant value creation: Because there is some substantial probability that the combination will be worth less than the sum of the parts, there must be an offsetting probability that it will be worth a lot more.

This has nothing to do with share price, or premium, or shareholder votes, or deal parameters, or if it's cash or stock, or debt, or any financing consideration; it is just the simple question of whether the two businesses can make more money operating separately or merged.

The proponents will focus on the merger's value creation. They don't go around saying that, historically, X% of mergers failed. The investors already know that bit. If the value creation they articulate is not convincingly high enough to offset the failure risk, the shareholders of at least one company would be better off keeping their company independent and will be disposed to vote against the merger.

In this instance, the value creation is very limited and entirely based on (possibly unsustainable) tax inversion savings. The premium is broadcasting that the shareholders are unconvinced, and expect enough of their peers to be voting against it.

(BTW, there has been some posting making a connection between Pfizer share buybacks and the merger premium. There is no connection. Yes, every dollar used in a buyback reduces the number of outstanding Pfizer shares and therefore increases the percentage Allergan shareholders will own in the eventual merged company; but it also reduces the value of that company by exactly the same dollar. So the effect is a perfect wash.)

(I'll crow a bit about Valeant after the market closes).

Dan.

These are all general risks inherent to any merger. What P 551 was looking for, I think, was something specific to this deal that is actually known to be a risk, besides obvious transactions like Teva. While all of these general risks you've outlined exist, they don't just apply to this deal.

Regarding the share repurchase while you are mathematically correct, don't forget the emotional side of investing and what this means to share prices. If everything worked exactly according to the strict math you are advocating then stock splits would never result in price movement. But we all know this is not true. Same for share repurchases. There is a large body of evidence that share repurchases impact the psychology of investors and they "believe" a stock is worth more than it is and thus the price they are willing to pay goes up. Crazy, yes, but true.

 

[Shoham]

These are all general risks inherent to any merger. What P 551 was looking for, I think, was something specific to this deal that is actually known to be a risk, besides obvious transactions like Teva. While all of these general risks you've outlined exist, they don't just apply to this deal.

Regarding the share repurchase while you are mathematically correct, don't forget the emotional side of investing and what this means to share prices. If everything worked exactly according to the strict math you are advocating then stock splits would never result in price movement. But we all know this is not true. Same for share repurchases. There is a large body of evidence that share repurchases impact the psychology of investors and they "believe" a stock is worth more than it is and thus the price they are willing to pay goes up. Crazy, yes, but true.

P551 asked for an articulation why the deal would not to happen. My articulation, reduced to one sentence, is that the value creation, as quantified by proponents, is too small to offset the general risks inherent to any merger.

As for the "emotional side" of investing, I am not a big believer in it. Sure, you can move a stock for a day or a week with a well-prepared presentation, or a stock split, or a wild accusation, or a share buyback, or a TV appearance, etc.; but the stock will gravitate right back to where it belongs based on fundamentals. (Sometimes, as with Valeant, it took over a year to get there, but usually it's a lot sooner rather than later).

(Stock splits is a recurring theme in this emotional-versus-fundamental debate. There are reputable studies that show that the stocks of companies that split outperform non-splitting peers. However, that doesn't prove either causation or emotionalism; it could simply be that a cultural norm has developed where management can judiciously convey a higher level of confidence by announcing a split. If it really was possible to achieve a higher return through pure emotionalism, wouldn't every stock then split as often as possible?)

Dan.

 

[anonymous]

P551 asked for an articulation why the deal would not to happen. My articulation, reduced to one sentence, is that the value creation, as quantified by proponents, is too small to offset the general risks inherent to any merger.

As for the "emotional side" of investing, I am not a big believer in it. Sure, you can move a stock for a day or a week with a well-prepared presentation, or a stock split, or a wild accusation, or a share buyback, or a TV appearance, etc.; but the stock will gravitate right back to where it belongs based on fundamentals. (Sometimes, as with Valeant, it took over a year to get there, but usually it's a lot sooner rather than later).

(Stock splits is a recurring theme in this emotional-versus-fundamental debate. There are reputable studies that show that the stocks of companies that split outperform non-splitting peers. However, that doesn't prove either causation or emotionalism; it could simply be that a cultural norm has developed where management can judiciously convey a higher level of confidence by announcing a split. If it really was possible to achieve a higher return through pure emotionalism, wouldn't every stock then split as often as possible?)

Dan.

Thank you, once again, for your insight and discussion. Best and most productive thread I have read on this board.

 

[anonymous]

Dan and #155, what are your thoughts on the delayed Teva divestiture?

 

[Shoham]

Dan and #155, what are your thoughts on the delayed Teva divestiture?

Teva is a done deal. If regulators whine about some minor aspects (like lack of competition in certain markets or drugs), those whines will be satisfied by addressing the specific details (like selling off the disagreeable element). There is nothing to see here.

Dan.

 

[anonymous]

Wow! I feel sorry for Allergan employees hurt by all that has happened (I'm one), I feel sorry for Valeant employees who undoubtedly will be hurt by this, but I think it's poetic justice for Ackman and Pearson.

 

[P 551]

Teva is a done deal. If regulators whine about some minor aspects (like lack of competition in certain markets or drugs), those whines will be satisfied by addressing the specific details (like selling off the disagreeable element). There is nothing to see here.

Dan.

I agree with Dan. Done deal. Some wrangling over product divestitures and related activities but nothing that is a show stopper. My guess is both parties anticipated most objections and are actively working on buyers, etc. would be surprised if it takes until June, but we will see.

P 551

 

[P 551]

Dan,

I have a question that maybe you can answer. Does the Zoetis spin off that took place 3 years ago, June ish, have any impact on the deal? Meaning do we need to wait until 3 years have come and gone before the deal can close? I recall some form of look back on tax free spinoffs that can be used in the type of deal with AGN and PFE. If we are in the 3 year window then the shares spun out for the creation of Zoetis are deemed to be part of Pfizer and therefore adds to the total shares and impacts the ratio of PFE to AGN...inching AGN closer to the 40% level perhaps. Do you have any insight on this? I've been dealing with spin off scenarios in my day job (when I'm not posting here) and I've had many confusing issues raised by accountants and lawyers! They aren't the same as here but I'm aware of the land mines of this type of transaction. Any insight would be great.

P551

 

[Shoham]

I promised to crow a bit about Valeant, so here goes.

• For almost 2 years I've been saying here that Valeant is a house of cards, with nothing I could see that's worth the (then) $40B valuation.
• Since the Philidor debacle exploded in November, I've been pointing out that they can fast talk investors, but how are they going to get the auditors (PWC) to sign off on their financial statements?
• Two weeks ago, when Valeant missed the deadline for audited statements filing (and dropped from $85 to $67), I pointed out that things will get calamitous fairly quickly once they also miss the (15 days) grace period. Here is what I said:

... If you miss the grace period, things start getting calamitous fairly quickly: Corporate bonds may go into technical default -- which makes them immediately due and payable, stock exchanges' rule require delisting -- which then require many conservative funds (like pension plans) to divest, and so on. [...]
Well, lets now wait and see what happens when they miss the grace period and the consequences start hitting.

Well, today they missed the grace period. Even though they already said they will miss it beforehand, today was the day. And they dropped over 50% all the way down to $33.50

(They also had some bad numbers and guidance; but missing the grace period and thus entering to technical default territory is the big deal).

The next shoe to drop would be the debt holders calling default (and why wouldn't they? -- they don't care if the business succeeds or fails, at least the senior debt holders don't, as long as there is enough money to pay them back -- even if it comes from selling functioning lab equipment as scrap metal -- that's what best serves their interest. They don't participate in any upside, so all they care is getting paid now.)

After that, I'd expect bankruptcy and the shareholders to be wiped out. Really, the only way to save the company (as Ackman is pointing out), is to rapidly sell off assets to reduce debt.

However, with Allergan and Pfizer -- two very important potential buyers of assets -- not able to buy anything substantial given the current merger agreement (unless it was at a huge bargain, in which case they'd amend the merger agreement to be able to take advantage), Valeant's ability to get a good price for their assets is reduced.

WHAT A TURN OF FORTUNES? Who would have thought, 23 months ago, that Valeant would be in a position of begging for Allergan to buy pieces of the company to avoid bankruptcy, only to have Allergan say they are too busy to bother...

Dan.​

 

[Shoham]

Dan,

I have a question that maybe you can answer. Does the Zoetis spin off that took place 3 years ago, June ish, have any impact on the deal? Meaning do we need to wait until 3 years have come and gone before the deal can close? I recall some form of look back on tax free spinoffs that can be used in the type of deal with AGN and PFE. If we are in the 3 year window then the shares spun out for the creation of Zoetis are deemed to be part of Pfizer and therefore adds to the total shares and impacts the ratio of PFE to AGN...inching AGN closer to the 40% level perhaps. Do you have any insight on this? I've been dealing with spin off scenarios in my day job (when I'm not posting here) and I've had many confusing issues raised by accountants and lawyers! They aren't the same as here but I'm aware of the land mines of this type of transaction. Any insight would be great.

P551

Sorry. Don't know. If the day-job lawyers and accountants are confused/ing, who am I to assert expertise?

In any event, the barrier to this deal isn't ZTS (worst case scenario, wait until the clock expires; it's not much longer than anyway); it is getting shareholder approval. And, unless I missed it, they haven't even set a date for that one.

Dan.