The merger and acquisition game being played out across the
healthcare sector this year has largely remained amicable. The
clear exception has been the tumultuous attempted buyout of
Irvine, Calif.-based Botox maker
and its activist hedge fund backers, including Pershing Square
On Aug. 1, Allergan's management filed a lawsuit in
the U.S. District Court for the Central District of
California in an attempt to block Valeant, Pershing Square,
and their affiliates from voting at a special shareholder meeting
scheduled for Dec. 18. Valeant and Pershing Square have been
pushing for this meeting for months in order to potentially
remove many of Allergan's current board members opposing the
This special shareholder meeting is setting up the likely
endgame in this adversarial process. Given that the end appears
near, let's consider three pivotal questions Allergan
shareholders should be asking themselves ahead of this
Is Valeant's offer inadequate?
In June, Allergan's management formally responded to Valeant's
acquisition offer, saying that "the Offer is grossly inadequate,
substantially undervalues Allergan, creates significant risks and
uncertainties for Allergan stockholders and is not in the best
interests of Allergan and its stockholders." When the
initial offer of $46 billion was announced on
, however, it was roughly 50% higher than the company's valuation
at the time.Viewed this way, Allergan's brass were either wrong
in its outlook or the market was seriously discounting the
company's forward-looking prospects.
Looking at Allergan's fundamentals and growth prospects, I
think there are good reasons to accept management's viewpoint.
Due to strong top-line growth from Botox and other key products
and an improving bottom-line resulting from an ongoing
restructuring process, Allergan is now projected to grow its
earnings per share by a whopping 42% next year. As a result, the
company's forward price-to-earnings ratio has fallen below
20 -- even after shares jumped 48% year to date following
Valeant's bid offer becoming public in April.
My view is that a fair offer for Allergan would be closer to
$66 billion based on an average sectorwide multiple of
approximately 25. In short, Allergan's management has legitimate
reasons to argue that this offer is indeed inadequate.
Will Allergan survive a hostile bid?
I think this question is much trickier to answer, but my guess
(emphasis: guess) is no.
Pershing Square chief
Bill Ackman is nothing if not persistent, as shown by his
short-sale position in
. So I would expect him to continue to pursue a deal -- hostile
or otherwise -- until it happens.
While Allergan previously floated the idea of "going big" by
executing its own acquisition to stave off a hostile takeover
's purchase of
would appear to leave the company short of potential candidates
to pursue. In short, management is rapidly running out of
options, and this lawsuit might be the last real shot at avoiding
a hostile bid.
What are the potential consequences of successfully
fending off a hostile takeover?
A quick look at the chart below would seem to suggest that
Allergan's shares could drop in dramatic fashion if management
can successfully waylay this takeover.
That's something for shareholders to consider, even if it
doesn't affect the underlying business. Then again, if the
company is able to generate the impressive earnings growth
analysts are guiding for, we could see some nice appreciation
over the coming years.
I think these three questions illuminate why Valeant and Pershing
Square are so eager to push a deal through before year's end. Put
simply, they would be getting Allergan on the cheap just prior to
the company generating some impressive levels of growth over the
next few years.
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3 Questions for Allergan Inc.
originally appeared on Fool.com.
has no position in any stocks mentioned. The Motley Fool
recommends Valeant Pharmaceuticals. The Motley Fool owns shares
of Valeant Pharmaceuticals and has the following options: long
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