By Dana Mattioli, Jonathan D. Rockoff and David Benoit
Michael Pearson runs a drug company, but that doesn't mean he
wants to spend money on science.
By contrast, science is prized at the company he wants to buy,
Allergan Inc. The Botox maker spends 17% of its revenue on research
and development, higher than many of its rivals.
That culture clash and Mr. Pearson's reputation as an aggressive
cost cutter are among the main reasons Allergan long resisted
merger overtures from Mr. Pearson's Valeant Pharmaceuticals
International Inc., a person familiar with Allergan's thinking
said.
Valeant and Allergan are on "completely opposite sides of the
drug industry," said Ronny Gal, a Sanford C. Bernstein analyst.
That dichotomy raises a central question of this takeover
battle: Do investment needs of the drug business make it
fundamentally different, or can it be rolled up and squeezed just
like any other industry?
As Valeant and its partner in pursuit of Allergan, activist
investor William Ackman, unveiled the nearly $46 billion offer on
Tuesday, they confirmed many of the target's worst fears. Valeant
said it would pare R&D spending after merging the
companies.
About 20% of the combined companies' 28,000 employees would be
cut, though that could include Valeant staff, Mr. Pearson said.
"When we went through and analyzed the cuts, these are not
people touching the customers, these are people sitting in offices.
We don't need people sitting in offices," he said.
Valeant offered to swap each Allergan share for $48.30 in cash
and 0.83 Valeant share. Based on Valeant's closing price Monday in
the U.S., the deal values Allergan at $152.89 a share, or roughly
$46 billion. Valeant said the offer was a premium to Allergan's
price of $116.63 on April 10, the day before Mr. Ackman's Pershing
Square Capital Management LP reached the 5% ownership level at
which it soon would have to disclose its holding. Pershing Square's
stake later grew to nearly 10%.
Allergan's stock closed 15% higher Tuesday at $163.65 on the New
York Stock Exchange. Valeant's shares rose 7.5% to $135.41 on the
NYSE.
Allergan said its board and advisers would "carefully review and
consider" the offer.
To close followers of Valeant, the Laval, Quebec, company's
intentions should come as no surprise. Seen as a maverick in the
health-care industry, Mr. Pearson is a serial acquirer known to
take over companies for their products, cut away research spending
and then try to boost revenue by moving the products through
Valeant's sales force.
The acquisition-heavy strategy focuses more on extracting cost
savings and tax benefits from deals than on seeking growth through
scientific advances.
Valeant spent about 3% of its revenue on R&D last year. In
2007, a year before Mr. Pearson joined the company, the figure was
12%. The company has made 100 acquisitions or joint ventures since
Mr. Pearson took over and has $17.4 billion in debt. Valeant's
board includes several deal makers, and the company's chief
financial officer is a former banker from Goldman Sachs Group
Inc.
While controversial in the health-care industry and on Wall
Street, Mr. Pearson's strategy has delivered for Valeant
shareholders. Since he took the helm, the company's stock has risen
more than 900%.
Valeant posted $842 million in revenue and $1.2 million in
profit in 2007. Last year the company had $5.77 billion in revenue
and posted an $866 million loss as it integrated its nearly $9
billion acquisition of Bausch & Lomb.
A central part of Mr. Pearson's approach is using acquisitions
to lower its tax rate through a structure called a tax inversion.
Valeant, which had been based in California, in 2010 merged with
Canada's Biovail and changed its domicile to Canada. Valeant's
resulting tax rate below 5% gives it an edge on competition from
the U.S.
Though Valeant said the rate would go up in a pairing with
Allergan, ultimately it expected to reap tax savings since the
Irvine, Calif., target pays taxes at much higher U.S. rates.
Mr. Pearson said in an interview that he and Allergan CEO David
Pyott first talked about a potential merger about 18 months ago and
that Allergan rejected the overture a few weeks later.
Mr. Pearson said he sought to rekindle the talks this February.
After a meeting was canceled and analysts suggested that Allergan
wasn't interested in a stock deal with Valeant, Mr. Pearson decided
to take the matter public, he said.
Mr. Ackman at a news conference Tuesday with Mr. Pearson crowed
about Valeant's cost consciousness, pointing to its ability to
achieve higher-than-expected savings in earlier deals, such as the
one for Bausch & Lomb. "They really have a perfect track record
of achieving synergies," Mr. Ackman said.
Valeant didn't meet with many of Bausch & Lomb's top
managers after buying the company last year from private-equity
owners Warburg Pincus LLC and instead moved quickly to lay them
off, people familiar with the matter said. Valeant reported that by
the end of this year it would be able to save $850 million a year
by cutting overlapping costs with Bausch & Lomb.
Mr. Ackman said he came to appreciate Mr. Pearson's penny
pinching at a meeting in which the activist investor requested a
Chipotle burrito for lunch instead of the salad being served. When
Mr. Pearson's assistant brought in the burrito, the CEO requested
$20 from Mr. Ackman to cover the cost.
Mr. Pearson assured Valeant shareholders on Tuesday that Mr.
Ackman was footing the bill for the news conference.
Write to Dana Mattioli at dana.mattioli@wsj.com, Jonathan D.
Rockoff at jonathan.rockoff@wsj.com and David Benoit at
david.benoit@wsj.com
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