Consider the Allergan takeover drama finally done, now that the cautionary tale has been told.
The first public recounting was given to a packed room during a breakfast hosted by the Forum for Corporate Directors at the Pacific Club on Aug. 27. The lessons came courtesy of a panel of executives and advisers who were part of a team that spent seven months knee-deep in the fight against a hostile takeover of the Irvine-based drugmaker—and eventually struck an agreement for a friendly, $72.5 billion sale.
On stage to share some insights picked up on the way to that blockbuster deal—it’s been named “Global M&A Deal of the Year by American Lawyer—were:
• Michael Gallagher, who was Allergan’s lead independent director, and retains a seat on the combined company’s board.
• Arnold Pinkston, who served as executive vice president and general counsel during the drama.
• Charles Adams, a Los Angeles-based managing director and West Coast healthcare group head for Goldman, Sachs & Co. who served as an Allergan adviser.
• And moderator Cary Hyden, a partner at Latham & Watkins LLP’s Costa Mesa office who was Allergan’s go-to outside counsel.
The talk centered on the hostilities that took up most of 2014, starting in April when Allergan and the rest of the world received disclosure that it would be double-teamed by Canada-based Valeant Pharmaceuticals International Inc. and activist investor Bill Ackman, whose Pershing Square Capital Management LP hedge fund had quietly accumulated just less than 10% of Allergan shares.
Key Takeaways
Some of the key takeaways for a crowd populated mainly by executives and service providers with ties to publicly traded companies:
• Know your place and universe. Adams told the audience that just about any drugmaker or medical device manufacturer is susceptible to a takeover attempt, particularly those with market capitalizations of $40 billion or less—a benchmark that takes in every OC-based publicly traded company in either industry segment.
• Get ready right now. Hyden emphasized the benefit of having a poison pill on the shelf and ready for adoption as a way to buy time for directors to consider, negotiate or fight off a takeover attempt. Pinkston noted the need to review and update poison pills and general plans on a regular basis. Allergan had updated its poison pill and run through various potential scenarios as a matter of general drill just two months before the Valeant-Ackman bid surfaced.
• Watch your timing—companies become most vulnerable to hostile takeovers some two months prior to their annual meetings, which hold out the ready possibility of getting an offer in front of shareholders.
• Never sit down with the other side unless and until you see genuine value for shareholders. The panelists agreed that the steadfast refusal by Allergan directors to meet with the hostile bidders proved correct, even though some shareholders might have wondered why they wouldn’t give Valeant and Ackman a hearing.
The Allergan board considered their bid low from the start and took issue with Valeant’s business model—a key consideration since much of the price would have been paid in Valeant stock. The Allergan board reasoned that a sit-down with the would-be raiders would send a signal to Wall Street that the deal was inevitable once a price was negotiated. The refusal to meet deprived Valeant and Ackman of a chance at that sort of momentum.
Personal Courage
• Board members must have personal courage, according to Gallagher, who said that Allergan directors had their character or judgment called into question in various ways during the fight, sometimes by colleagues or acquaintances of longstanding. Such attacks can be withering, he said, and the characteristic of personal courage is the best antidote.
Gallagher circled back to his point on personal courage, tying it to what he called Allergan’s success in sticking to the high road in response to attacks by Valeant and Pershing, issuing polite but firm statements in response that he said proved effective over the long haul of the fight.
The panelists peppered their remarks with some frank observations—perhaps at some ease because the Forum for Corporate Directors, a private organization, granted access to the press on the condition that there would be no direct quotes. Some words most often associated with diseases were used to describe the nature of the attacks on Allergan board members. Ackman drew some stinging rebukes, including Gallagher’s assessment that the hedge funder put his ego ahead of any other concerns as the deal unfolded.
Pyott, Ingram
The panelists also agreed that the board made the right call with steadfast belief in Allergan Chief Executive David Pyott, who increased shareholder value more than 2,000% in his 17 years at Allergan’s helm.
Pinkston focused on the inside aspect of the defense, crediting what he called a well-coordinated team that counted on Allergan’s legal department as an anchor and had an intangible working on its side—the general counsel said he believes Valeant and Pershing underestimated the tenacity of the board.
Panelists also pointed out the role of former Allergan President Douglas Ingram during the eight-month takeover battle.
Allergan knew the effort would be intense and wanted Pyott to be Mr. Outside and serve as the spokesperson for the company and board, Gallagher said.
He said that left the company to be run by Ingram, whose assignment was to make sure the business performed well during the takeover.
