Valeant Makes Hostile Bid For Allergan

Valeant Pharmaceuticals has made a $47 billion cash-and-stock offer to buy specialty pharmaceuticals maker Allergan in a deal backed by activist investor William A. Ackman.

Adding Allergan’s $6.3 billion in 2013 sales to Valeant would create a firm with revenues of $11.7 billion. Valeant would save some $2.7 billion by combining headquarters, eliminating duplicative operations, and cutting research spending.

Allergan, the maker of Botox wrinkle reducer, says it is examining Valeant’s proposal. However, on April 22, the same day that Valeant made its hostile bid, Allergan also adopted a shareholder rights plan intended to make a deal more costly for a hostile acquirer and to provide Allergan’s board more time to assess the Valeant offer.

The combined firms would be a leader in ophthalmology, dermatology, aesthetics, and dental markets, according to Valeant CEO J. Michael Pearson. Together, the two companies can achieve “significant synergies by applying Valeant’s unique operating model to a combined set of assets,” he says.

That model, applied in previous acquisitions, involves radical cost cutting and a sharp reduction in R&D. In Allergan’s case, Valeant would eliminate early-stage research programs. On its own, Allergan plans to increase R&D spending from about $1 billion in 2013 to $1.5 billion by 2018. Valeant, in contrast, anticipates a $300 million R&D budget for the combined firm.

Ackman, who heads private equity firm Pershing Square Capital Management and has amassed just under 10% of Allergan’s shares, says the proposed deal is “the most strategic and value-creating transaction I have ever analyzed.” He has committed his shares to the takeover.

The activist investor has influenced others firms including Air Products & Chemicals, which in September decided to replace its CEO, John E. McGlade. But the Allergan bid marks the first time that Ackman has formed an alliance with an acquirer to target another firm.

In a note to clients, Marc Goodman, an analyst with investment banking firm UBS, says he doesn’t believe Allergan’s management has any interest in selling. But if Valeant succeeds in its bid, “it should be a wake-up call to the investment community that no company is untouchable.”