I agree, looks like a small amount to me.
Here is my math:
(Numbers are mostly from memory, but should be fairly close to the actual ones)
- (Legacy) Allergan had about 300M shares outstanding.
- Ackman bought 9.7% of that number (about 29M shares)
- Per his disclosures, his average purchase price was $128 (for a total of $3.7B)
- The (first) Valeant offer was worth, at the time, about $153/share.
- I don't remember what was the share price immediately after the announcement, but I think it was around $160.
- The ultimate Actavis takeover price was about $219/share
So, how much profit did Ackman make, and how much of it was insider-tainted?
- (1) The most comprehensive calculation would look at his overall profit.
- Overall, his profit turned out to be about $2.6B
- That would be his gain between his purchase price ($128) and eventual deal price ($219)
- = 29M * ($219-$128)
- Arguably, the entire profit is a consequence of his forbidden insider trading, and should all be disgorged; without the insider-trade action, the Valeant takeover bid would have been impossible, Allergan wouldn't have been "in play," and the Acavis deal never developed.
- (2) A less onerous calculation would only focus on his gain during the time he possessed insider-information.
- That gain is about $930M
- From his purchase price ($128) to the market price immediately after the announcement ($160)
- = 29M * ($160-$128)
- Arguably, any gains he made after the announcement was not on the strength of his insider information and would have been available to anyone else willing to gamble that there will be an eventual deal at a higher valuation.
- (3) An even more generous calculation would only look at the (initial) Valeant offer price.
- That gain is about $730M
- From his purchase price ($128) to the (initial) Valeant offer price ($153)
- = 29M * ($153-$128)
- The theory here is that his insider information was only with regards to that initial Valeant offer. He had no prior knowledge or assurance that the market will bid the share price even higher or that Valeant (and later Actavis) would choose to bid higher.
If it was me, I would judge that the ill-gotten profit are somewhat higher than the second calculation ($930M), but nowhere near the first ($2.6B). This is because if he had played by the rules, waited until after the announcement, and then bought 9.7%, he would have still made a lot of money; so the ill-gotten gain is just how much MORE he made through the insider trade.
No matter which calculation is used -- even the extra-generous third calculation -- it shows an ill-gotten profit of well more than double the settlement announcement. So, therefore, I concur that the amount is too low.
Judge Carter asked to review this agreement. It is extremely rare for judges to overrule deals made between the litigants (if both sides are satisfied; then the controversy is removed and there is no further cause for judicial intervention; for a judge to rule that the deal is so grossly unfair that it should be over-turned, in effect, makes the judge a stronger advocate for one party than their own attorneys who negotiated the deal!). Ackman and Valeant pointed out that judges always ask to review deals and it's just a formality. They are correct that judges always review deals, and most of the times it's just a formality; but given the numbers, it may be more than a formality this time.
I'll go out on a limb and opine that there is at least an even chance that is one of those rare situations where the judge will not be ok with the settlement (or, that the parties will preemptively change it to increase the amount so as to not risk the judge's ire).
One more point before I finish.
Ackman's Pershing Square (PS) reserved about $75M against this lawsuit; Valeant, to my memory, didn't reserve any. They will be actually paying about $200M and $100M, respectively. Reserving is an accounting and reporting mechanism to assign the anticipated legal losses to the time period when such are first surmised, rather than pretending they don't exist until the judgement (or settlement). Under-reserving, although it may appear like just a paperworks issue, can have severe consequences. For example, investors in PS who bailed out of the fund after the lawsuit was filed, but before the settlement, actually got MORE money back than they should have (since only $75M was being held back). Consequently, I believe, more PS investors bailed than would have otherwise, because they knew they would be getting more as long as they bail before the lawsuit is resolved. Conversely, the depleted count of investors who stuck around with PS (and any new investor) will now be paying the full ($200M) bill on behalf of all the investors who bailed. (I recall, in an earlier post, that I railed against this under-reserving).
Happy New Year, everyone; and my sympathy and wishes for quick career recovery for anyone laid off (and, as always, hit my LinkedIn if you want me to pass your resume)
Dan.
