Day 126 MIT Sloan Fellows Class 2023, M&A and PE 7 "Active investors and strategic discrepancy"
Valeant, Allergan and Ackman: overview from ChatGPT
In 2014, Valeant Pharmaceuticals International made an unsolicited bid to acquire Allergan, a company specializing in aesthetic medicine, for $47 billion. Allergan rejected the initial bid, but Valeant persisted and enlisted the help of activist investor Bill Ackman and his hedge fund, Pershing Square Capital Management, to put pressure on Allergan to enter into negotiations.
Ackman purchased a significant stake in Allergan and publicly advocated for the merger with Valeant, calling it a "dream combination." He also accused Allergan of not providing enough value to shareholders and criticized the company's leadership. Allergan attempted to find alternative bidders and made a deal with Actavis, but Valeant increased its offer, and eventually, Allergan agreed to a merger.
The deal was contentious, with Allergan accusing Valeant of using questionable business practices and Valeant accusing Allergan of undervaluing the company. In the end, the deal closed in August 2014, with Valeant paying $54 billion for Allergan. However, the merger was not without its issues, and Valeant faced criticism for its business practices and high levels of debt. The company's stock price plummeted, and Valeant eventually changed its name to Bausch Health Companies in an effort to distance itself from its controversial past.
Ackman's role in the deal was significant, as his activism and investment in Allergan helped pressure the company into negotiations with Valeant. However, the deal was also criticized for the potential conflict of interest that Ackman's involvement created, as he stood to profit from the merger as a shareholder in both companies.
Valeant motivation
Valeant's strategy is pretty simple.
- Growth through acquisition
- Increase pricing and cut cost to maximize profit
- Pose variety of portfolio
Then, there is a significant gap in its strategies between Valeant and Allergan.
Allergan is more R&D focusing strategy and builds strong relationship with healthcare professionals.
Process: Calculating Deal value and pricing
- Calculate market value
- Combine two market values and calculate enterprise value after substract cash payment
- Calculate number of shares after merger with exchange rate( if buyer determined % of cash in deal, substract cash from advertised offer price and calculate exchange rate) - exchange rate * target shares + buying company shares
- Calculate Pro Forma buying share value( 2 divided by 3)
- Calculate value of target after acqusition and multiply it with exchange rate.
- Then you can get actual premium!
CVR(Contingent value right)
A contingent value right (CVR) is a type of financial instrument that represents a contractual right to receive an additional payment or distribution if certain predefined events occur. The CVR is typically issued as a part of a merger or acquisition transaction, in which the acquirer may offer CVRs to the shareholders of the target company as a way to sweeten the deal and provide additional value.
It is a popular way to mitigate the gap between risk of uncertain R&D and buying price.
CVRs are commonly used in the biotech and pharmaceutical industries, where they can provide investors with a way to participate in the success of a new drug or treatment without having to bear the full risk of the development process. However, they can also be used in other industries, such as technology or energy, where a specific outcome or event can have a significant impact on the value of a company.
Activitst incentive
They want to buy shares at lower price and want to sell higher price. They can't avoid posion pills, so they delay disclosure as long as possible.
Market Price Algebra
Market price is calculated by considering cash and synergy.
Then, based on probability of deal success, the current share price should be calculated. Normally, no deal share price equals pre deal share price.
Then, we can estimate probability of success and post deal share price.
Replacing corporate board
Replacing corporate board is not easy task.
If there is classified board which is constantly changed every two years, you need to wait for two years. However, activitists really want to complete this activitity as soon as possible. Time is not a supporter of activitists.
