Allergan Rejects Valeant Pharmaceuticals Takeover bid

Allergan (Irvine, CA, USA), the manufacturer of Botox, has rejected a USD 46 billion unsolicited takeover bid made by Valeant Pharmaceuticals (Valeant; Laval, Canada), on the basis that the proposal substantially undervalues the company.

The Valeant offer was made in conjunction with Pershing Square Capital Management (New York, NY, USA), an activist hedge fund founded and run by Bill Ackman, which reached a 5% ownership stake in Allergan on April 10, 2014, and started aggressively buying more shares until reaching a 9.7% hold on the company. At that point, Valeant and Ackman made an unsolicited cash and stock offer for the company that represented a 32% premium on Allergan's market value at the time.

The offer was rejected by the Allergan board of directors unanimously, claiming that Valeant's plan for an (at least) USD 2.7 billion annual cost cut would prevent the company from delivering growth that it could produce on its own, and that the offer was too risky. Allergan said that the current level of research-and-development and sales-and-marketing spending had enabled Allergan to launch several new products in recent years, increasing annual sales by an average of 11% since 2011. The company set a target of a 20%–25% increase in earnings per share in 2015.

Allergan's rejection was expected, since the company has adopted the so-called “poison pill defense”, wherein if any unapproved investor acquires more than 10% of Allergan's shares, other stockholders would have the right to buy discounted shares. Valeant, on its part, said that it is planning to hold a special meeting of Allergan shareholders to remove some (or all) of the company's directors; it also said it may call a referendum to see if the shareholders support Allergan-Valeant negotiations. The rejection of the offer also potentially sets the stage for a proxy battle between the companies.

“Valeant's method of cutting and slashing doesn't hold up for more than a brief period of time,” said David Pyott, CEO of Allergan. “Given Valeant's aversion to early-stage investment, under Valeant's ownership, this franchise would not have yielded the growth and remarkable value that Allergan has achieved.”

“We are disappointed that Allergan has rejected our value-creating offer without engaging in any substantive discussions with Valeant or Allergan’s largest stockholder, Pershing Square,” Valeant said in a statement. “We remain committed to pursuing this transaction.”

Valeant has bought roughly a half-dozen companies in the last two years, including contact lens maker Bausch & Lomb for USD 8.7 billion in 2013, shortly after acquiring Medicis Pharmaceuticals for USD 2.6 billion at the end of 2012. Valeant has grown by cutting spending and buying companies or proven products that will boost earnings, and has set its sights on becoming one of the world's five biggest pharmaceutical companies.

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