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Allergan takeover saga ended with deal of the year

Boxes of Allergan Inc. Botox cosmetic are arranged for a photograph at a doctor's office in Manhattan Beach, California, U.S., on Tuesday, April 22, 2014. Valeant Pharmaceuticals International Inc. offered to buy Allergan Inc., maker of the Botox wrinkle treatment, in a cash-and-stock deal valued at $45.7 billion in the latest step of the Canadian company’s plan to become one of the world’s largest drugmakers. Photographer: Patrick T. Fallon/Bloomberg©Bloomberg

For the past three decades the great and the good of the pharmaceuticals industry have descended on San Francisco for a week in January. They ostensibly come for JPMorgan’s annual healthcare conference at the historic St Francis hotel, but everyone in the sector knows that the real action takes place in the cocktail bars and restaurants that are dotted around Union Square.

It was here, almost exactly a year ago, that two men met to hatch a plan that would morph into the biggest and most acrimonious takeover battle of 2014. The following account of that battle is based on interviews with people familiar with the matter, as well as court documents and filings.

One of the men was Bill Doyle, a former Johnson & Johnson executive who had recently started working for his old classmate, the billionaire hedge fund manager Bill Ackman. The other was Michael Pearson, chief executive of Valeant Pharmaceuticals, who Mr Doyle knew from their days as management consultants at McKinsey. The pair discussed the merits of forming a novel dealmaking partnership between Mr Ackman’s hedge fund and Valeant.

Under Mr Pearson’s leadership Valeant had become a mergers and acquisitions juggernaut with a voracious appetite for debt-fuelled deals. After buying a company, Mr Pearson extracted higher profits by taking an axe to costs, a strategy that had served his investors well.

Mr Pearson thought teaming up with Mr Ackman, one of the most feared activist investors on Wall Street, could help Valeant snare a company he had been interested in for several years: Allergan, the maker of blockbuster wrinkle treatment Botox.

The San Francisco meeting went so well that Mr Pearson and Mr Ackman met three weeks later and discussed a bid. After that, things moved quickly: the pair agreed on the terms of an alliance and signed a confidentiality agreement. Pershing Square, Mr Ackman’s hedge fund, would quietly amass a large stake in Allergan and then Valeant would pounce. Together they would exert enough pressure to win over other investors.

Around the same time, Mr Pearson invited David Pyott, Allergan’s chief executive, to dinner, but the pair never met. Mr Pearson cancelled after Mr Pyott let it be known through a number of industry analysts that he had no interest in pursuing a transaction with Valeant.

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It is hard to overstate the disdain Mr Pyott felt towards Valeant and its chief executive. He thought the company’s strategy of slashing spending on research and development would destroy shareholder value, and his legacy at Allergan.

Mr Pyott joined the company in 1998 and transformed it from a niche maker of eyecare products into one of the most admired companies in the industry. Born in England to Scottish parents, his accent has developed a hint of transatlantic drawl, but his soft-spoken, polite style can seem at odds with the cut and thrust of the US boardroom.

During March and April, Mr Ackman amassed a stake of almost 10 per cent in Allergan. Then, on April 22, Valeant and Pershing Square went public, announcing their $47.5bn hostile takeover offer at a press conference that lasted almost four hours.

The seven-month takeover battle that followed was brutal. Mr Pearson and Mr Ackman launched a bitter proxy war to eject Allergan’s directors and replace them with a board more amenable to a takeover.

Allergan responded by attacking Valeant’s business model and trying to block the attempt to unseat its directors in the courts. In the middle of June, the Botox-maker went so far as to publish a cache of private emails from Morgan Stanley. The investment bank had tried, and failed, to win a place on Allergan’s advisory team, but ended up working for the other side.

Before Morgan Stanley switched teams it sent a series of emails to Allergan that were highly critical of Valeant. In one, Rob Kindler, the banker leading Valeant’s pursuit, was quoted as describing the company’s business model as a “house of cards”.

Meanwhile, Allergan came close to buying Salix, a gastrointestinal drugmaker that was worth about $10bn, in September. The deal could have made Allergan too large for Valeant to swallow, but it called talks off at the eleventh hour after uncovering an accounting scandal that would claim Salix’s finance chief.

Valeant raised its offer twice and twice it was rejected. On a Sunday in early October, Mr Ackman and Mr Pearson met at Teterboro airport in New Jersey, a favourite for executives flying their private jets in and out of New York. They discussed raising the offer for a third time. Mr Ackman was keen, but his partner wanted to wait.

However, the following Tuesday, the news they were considering sweetening their bid leaked, much to the chagrin of Mr Pearson and his bankers. Two weeks later, the Financial Times asked Mr Pearson if he and Mr Ackman had fallen out over strategy. “Do we always agree on every tactic? No,” he replied.

Despite growing tensions in the Valeant camp, a deal appeared to be within reach. If Valeant could secure a majority of shareholder votes at a special meeting in December, it would be able to eject Allergan’s directors and push for a transaction.

The maths did not look good for Allergan. Some of its biggest investors wanted to sell to Valeant, as did a number of hedge funds that had bought shares in anticipation of a deal. Its only real hope was that a Californian judge would prevent Mr Ackman from voting his 10 per cent stake.

It was around this time that Allergan adopted, in the words of one of its advisers, an “anyone but Valeant” strategy. Back in August, Actavis, an Ireland-based drugmaker that was growing at a blistering pace, had signalled its interest in buying the company. Mr Pyott was friendly with its recently installed chief executive Brent Saunders — the pair had dined together over the years — but the discussions never really took off. At the end of October, the talks resumed with a fresh sense of urgency.

On November 4, came the moment that everyone had been waiting for: the Californian court ruled that Mr Ackman could vote his stake at the December meeting. Allergan would almost certainly lose and be forced into the arms of Valeant.

The following day Allergan signed a confidentiality agreement with Actavis and the pair began rushing to complete a deal. Its days as an independent company were over. Mr Pyott and Mr Saunders agreed that they had to do the deal at a price that would make it impossible for Valeant to come back with a counter-offer.

Even so, the $219-a-share agreed deal, which valued the company at $66bn, stunned observers when it was announced on November 17. The highest bid Valeant had made was $179 a share. It took less than an hour for Mr Pearson to rule himself out of the race.

In the words of one of his advisers, it was a “bittersweet” moment for Mr Pyott, who stands to make hundreds of millions of dollars from his share options when the deal is completed. As for Mr Ackman and Mr Pearson, neither will say whether they have any plans to work together in the future.

Allergan, Valeant, Actavis and Pershing Square declined to comment.