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Valeant discretion

17 November 2014 By Richard Beales, Robert Cyran

Valeant has tried a seven-month M&A experiment that boss Michael Pearson – and other corporate chiefs – should think twice about repeating. The $45 billion drug company’s failed tilt at Allergan alongside Bill Ackman’s Pershing Square landed a $400 million windfall. But with Actavis snatching the quarry, Ackman and Allergan’s owners have made out best. Valeant lost time and risked legally questionable tactics.

There’s nothing new or problematic about an investor buying a stake in a company, as Pershing Square did with a 9.7 percent stake in Allergan, and then agitating for a sale. Activism has been a money-spinner in recent years, delivering among the best returns of all hedge-fund strategies in 2012, 2013 and so far in 2014, according to indexes maintained by Hedge Fund Research. Ackman’s fund was up a very strong 31 percent this year through the end of October, Reuters reported earlier this month.

What was novel was Ackman’s agreement ahead of time with Valeant, a potential buyer of Allergan, to work together. Valeant must have known the move would put Allergan in play, but with Pershing Square’s votes and market clout Pearson would have hoped to have the edge.

That’s not how it turned out. Instead, Valeant and Allergan exchanged potentially damaging critiques in a long conflict. That has cost Valeant the chance to pursue other targets, in line with its strategy of growth through acquisitions. Pearson has a consolation prize, largely thanks to a 15 percent share of Pershing Square’s profit on its Allergan shares. But that may not be enough to make the scars worth bearing.

The legality of the deal Valeant made with Ackman is also uncertain. A judge ruling on whether Pershing Square could vote its Allergan shares found earlier this month that the plaintiffs in the lawsuit had raised “serious questions” about whether the arrangement violated U.S. securities rules on insider trading. That may never be settled for this case, but a successful bidder indulging in similar tactics could find itself in a legal morass, at best.

Sure, Allergan might never have contemplated an approach from Valeant alone. But an activist hedge fund doesn’t share the same goals as a corporation, even a serial acquirer. Ackman’s $2 billion or so of profit may encourage him to look for other similar opportunities. Companies would be better off acknowledging the tactic as too clever by half.


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