By David Benoit And Liz Hoffman
On a Sunday evening in early October, Valeant Pharmaceuticals
International Inc. Chief Executive Michael Pearson met the activist
investor William Ackman at New Jersey's Teterboro Airport. On the
agenda for the globe-trotting duo: whether to raise their $53
billion bid for Allergan Inc.
Their hostile pursuit of the Botox maker was in its sixth month
and Allergan appeared to be slipping out of their hands. The
pharmaceutical company was said to be exploring a large purchase of
its own or selling itself to another suitor.
Mr. Ackman argued that a decisive increase in the offer for
Allergan would create a surge of momentum, drawing more investors
who supported the deal into Allergan shares and boosting Valeant's
stock, too. Mr. Pearson, who already had increased Valeant's bid
despite pledging not to bid against himself, said it was too soon
to offer more. He didn't want to use up their fire power only to
get topped by a rival.
Their debate continued until this Monday, when their fears were
realized: Allergan announced it would be acquired by Actavis PLC, a
rival drug maker, for $66 billion. Valeant bowed out, confirming
Wednesday it wouldn't compete with the $219-a-share offer.
It had been an unorthodox--and widely watched--alliance, teaming
an activist investor with a corporate buyer to try to land one of
the year's biggest deals. Their travails show that the setup
created tripwires that don't typically surface in takeover
attempts.
The two men didn't always see eye to eye, people familiar with
the matter say. The arrangement didn't deliver all that each side
hoped it would. The tie-up brought heavy legal scrutiny. And,
ultimately, it didn't land the deal.
Still, even in defeat, the two sides can look forward to a tidy
profit. Valeant and Pershing Square Capital Management LP, Mr.
Ackman's firm, stand to make a combined $2.6 billion on paper from
the Actavis deal price. The people say the men remained on good
terms throughout.
"It was a great partnership with Valeant," Mr. Ackman said. "Our
respect for them only increased over the term of the
transaction."
This account of their pursuit of Allergan is based on interviews
with people familiar with Valeant and Pershing Square, as well as
court documents and filings.
The partnership started in February when the two camps hatched a
plan to take over Allergan. Pershing Square would build a 10% stake
to pave the way for a potentially hostile fight, led by
Valeant.
"It was like a nuclear launch device; both guys have a gun, both
guys have a button," Mr. Ackman later said in connection with a
lawsuit filed by Allergan about Pershing Square's setup with
Valeant.
The first cracks in the partnership emerged early. Valeant hoped
one benefit of teaming with Mr. Ackman would be his reputation as a
stock-picker. The company had been targeted by bearish investors
who argued its acquisition-driven business model wasn't viable in
the long term.
Mr. Pearson hoped the imprimatur of Mr. Ackman, who had spent
months studying the Canadian drug maker, would discredit short
sellers and buoy Valeant shares.
On April 22, the day the pair made their offer official, Mr.
Pearson prodded Mr. Ackman to be more explicit in his support of
Valeant. In an email with the subject line "You've been busy with
the press," Mr. Pearson said: "Maybe you should also emphasize
quality of our company," according to court papers.
Mr. Ackman made the effort, speaking extensively that day about
Valeant at a public presentation on the bid, praising Mr. Pearson
and Valeant's performance.
But questions kept swirling about Valeant's business model,
which Allergan also hammered.
In June, Mr. Pearson told The Wall Street Journal he was
surprised that Mr. Ackman's blessing hadn't quieted naysayers.
"We thought that validation would be, maybe, more helpful than
it's been, " he said. Some in the Pershing Square camp bristled at
the remark.
Valeant didn't help its cause in July when it released results
that disappointed the market. Pershing Square felt Valeant did a
bad job guiding Wall Street.
Meanwhile, the Valeant side fretted as Mr. Ackman's reputation
suffered in another investment: his campaign against nutritional
company Herbalife Ltd.
In July, Mr. Ackman delivered a presentation he promised would
be a "death blow" to Herbalife. Instead, the stock recorded its
biggest one-day percentage gain ever. That day, Valeant shares
slipped.
Valeant advisers worried Mr. Ackman's public stumble would
weaken their joint campaign. Yet hours later, when Messrs. Ackman
and Pearson spoke with Allergan investors in Toronto, the two men
appeared friendlier than ever.
Such investor meetings were integral to the duo's strategy. At
one, in May, some shareholders that bet on events like mergers
suggested the team should launch a tender offer, seeking to buy
Allergan shares from investors despite the board's resistance to
the deal.
Three weeks later, the duo followed that advice, but it proved
far more controversial than they expected.
Regulations prohibit an investor like Mr. Ackman who knows about
a coming tender offer from buying stock in the target company if
there have been "substantial steps" taken toward the offer.
Pershing Square and Valeant said they hadn't taken any steps toward
a tender offer back in April, so believed they were in the legal
right.
But the tender offer move was the opening Allergan had been
waiting for. The company accused the duo of insider trading in a
federal lawsuit.
A judge earlier this month found there were "serious questions"
about whether Valeant and Pershing Square had broken the law and
ordered them to make additional disclosures, but let them proceed
with the bid.
Mr. Ackman came to regret launching a tender offer. It had been
meant to be a largely symbolic effort to assure shareholders, but
turned into a legal and public-relations headache.
The day after the judge's decision to let the Valeant bid
proceed, Allergan entered into a confidentiality agreement with
Actavis. By early October, as news leaked that Allergan was
weighing other options, the men had their meeting at Teterboro to
strategize on whether to bump the price.
Mr. Ackman wanted to move quickly. The Valeant side wasn't
convinced. Valeant had earnings in two weeks and executives
expected to surprise investors with their strength. The market did
cheer the results, but Mr. Pearson had begun to believe the noise
was keeping his company's stock depressed. That made it more
expensive to use in bumping the price.
In the end, the battle ended like most bidding wars do, with the
prize going to the highest bidder.
Write to David Benoit at david.benoit@wsj.com and Liz Hoffman at
liz.hoffman@wsj.com
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