Valeant will be hard to stop
Cheap money and greed from the Allergan bidder's side are strong incentives.
I have to rethink my concerns about what happens if Valeant (VRX) walks away from Allergan (AGN). In preparation for my interview with David Pyott, the CEO of Allergan, I took a look at what all of the other drug companies' stocks have done since the bid, and the answer is pretty much a big fat zero. So I figured the stock would go back to where it was while Ackman's Pershing fund was buying it up but before the offering was announced.
After listening to Pyott last night, I now think it can be higher. Not necessarily as much as it is now, because you will always have disappointed arbitrageurs, but up enough that the risk reward is better than I thought.
Pyott is saying that he can do a huge restructuring to bring out value or undertake a value-creating acquisition. I don't know if the market will like the latter, unless it is an inversion. The former could be well-received.
Nevertheless, it is hard to think about how you can stop Valeant-Ackman, given that the egos on the line here, both Bill Ackman's and Mike Pearson's, are so huge and the desire so incredible and the need to win Allergan so important that there doesn't seem to be a price that Valeant won't pay.
The question for me is: Will David Pyott be this year's Peter McCausland? The former CEO of Airgas was able to use Pennsylvania takeover law to just say no to a hostile bid from Air Products while promising that the company could create much more value than the acquirer could.
McCausland was right, as it turned out that Air Products truly had launched a lowball bid, taking advantage of a momentary dip in the numbers from the Great Recession, and Airgas' stock soon soared well above the failed bid price.
McCausland was the founder and a 10% holder of stock, so his pleas were well-heeded because he seemed totally aligned with the shareholder base. I think, despite Ackman's charges to the contrary, Pyott is. too, although he doesn't have that kind of stake in the enterprise. Unfortunately for Pyott, this isn't a Pennsylvania just-say-no situation, so the comparison may be moot anyway.
The numbers have gone up of late at Allergan, and the analyst community is now confident that the stock is not all that expensive.
There are four ways to stay away from the clutches of Valeant-Ackman:
- An acquisition by another company, something I regard as unlikely, given the lofty levels of Allergan versus most of the group.
- A buyback and restructuring that would, I think, keep the stock at these levels without Valeant.
- An inversion acquisition, which would raise numbers and again keep the stock up here.
- A big win from the pipeline, which I regard as a long shot, because while there is a hopeful macular degeneration drug in the pipe, I don't know if it will be as effective as Regeneron's (REGN) Eyela, and a second potential blockbuster for glaucoma may be too far away to matter.
Can Allergan stir enough seeds of doubt about Valeant to drive that stock down to make its currency worth less? I think that Valeant will just go borrow more money to be able to pay up, because money is so cheap. I believe Pyott when he says that the combined company won't do that well because of a potential loss of customers. But I also think, in the end, that's not an issue unless you believe that the world is binary and you either own Allergan or you own Valeant and can't own anything else.
So my bottom line: I am more optimistic about the Allergan stock price without Valeant, but I also think it will be very difficult to keep Valeant from winning because of cheap money and raw need and greed from the acquirer's side.
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