Inside A Hostile Takeover: The Allergan-Valeant War
By Rob Wright, Chief Editor, Life Science Leader
Follow Me On Twitter @RfwrightLSL
Everything was going fine for David Pyott on Monday, April 21, 2014 — until around 2:15 p.m. That’s when Pyott, then president and CEO of Allergan, saw Bill Ackman, billionaire hedge fund manager and activist investor, on CNBC.
Having used the fund he founded (i.e., Pershing Square Capital Management) to quietly acquire 9.7 percent of Allergan’s shares, Ackman had become the company’s single largest shareholder. And now he was on TV explaining why Allergan should welcome being acquired by Valeant Pharmaceuticals International (NYSE: VRX). It was the beginning of what Pyott later would refer to as “seven-and- a-half months of total war.”
The cash-and-stock transaction was valued at just under $46 billion, a figure Ackman listed as “a 38 percent premium” during his CNBC interview.
Pyott watched as Ackman used the CNBC platform to cheerlead short-term investors to buy in, while cautioning Allergan long-term shareholders that another bigger and better deal wasn’t waiting in the wings.
When asked what was one of the biggest lessons he learned during this tumultuous time, Pyott responds, “Fortune smiles on the well-prepared.”
WHERE DOES HOSTILE TAKEOVER PREP BEGIN?
A day after Allergan found out about Valeant’s plans, the company implemented a poison pill defense; existing shareholders could buy stock at a steep discount if any single investor acquired more than 10 percent of Allergan shares. “The poison pill is always a part of being ready for a raid,” Pyott explains. “You have it on the shelf and typically only use it when you need to buy time for the board to negotiate the best outcome, including agreeing to negotiate with the raiders.”
Of course, most companies have a plan in place for what to do in the event of a crisis or raid. “If you don’t scenario plan at least once a year, then, frankly, you are not doing your job,” states Pyott. “You should always try to go through a variety of takeover scenarios to see what crack you think raiders will try to stick a knife into and pry open.” At Allergan, the board had conducted such an exercise about six months before Ackman showed up. “You implement your crisis plan, but sometimes you have to quickly formulate a new plan because during a hostile takeover, the ‘war’ goes in all sorts of unexpected directions.”
Pyott says the key to a crisis plan is making sure you have the right processes and people to move rapidly to adapt to new unforeseen situations. The people component of that plan starts with building and maintaining a very competent board of directors. But building such a board can take a long time, which is why Allergan developed a matrix to track the experience of its directors. The matrix showed whether board members had experience/background in key categories such as pharmaceuticals (the most important), healthcare, finance, scientific, and consumer, just to name a few. “Of course names could be in multiple boxes,” Pyott clarifies. “The matrix was very helpful when we were building and maintaining our board. It helped us stay focused on determining where we were the weakest.”
"You should always try to go through a variety of takeover scenarios to see what crack you think raiders will try to stick a knife into and pry open."
David Pyott
That board strength came in handy when the Valiant/Ackman acquisition attempt began. At the time, the board had a lot of tenure; most members had been around for five to 15 years. Henri Termeer, the former CEO of Genzyme (and a board member for only four months prior to the takeover attempt), even had gone through his own similar saga with the sale of that company to Sanofi.
COMPETENCY REQUIRES PREPARATION AND FREQUENT COMMUNICATION
Having a competent board of directors that can work well together is always important, but especially when faced with a crisis. During the takeover time period, the board met 34 times, with only four of those being face-to-face, and almost every meeting being attended by every board member. But Pyott admits that conducting board meetings via a conference call is more difficult than in person. “When on the phone you can’t see their body language, if they are frowning, smiling, or just looking downright scared,” he says. “Strong rapport is critical.”
“The best way to keep everyone on the same page and alleviate pressure is through frequent communication,” he explains. But don’t make the mistake of viewing email as an adequate substitute for frequent verbal communication. “We knew that no matter what happened, we were probably going to get sued for having sold or sold for too little,” he states. “While we were extremely careful with emails, we did have some pretty major email incursions towards the middle of the summer.” Bottom line for Pyott: In-person communication allows for transmitting more information, more clearly, while providing less ammo for lawyers later.
Pyott says the large number of board meetings during this time period was necessary because the company had never encountered a situation like this — a company and an activist hedge fund manager combining forces in a strategic takeover attempt. “I also didn’t want to let what was being discussed in the media get too out of hand,” he states. “That’s why I never let more than five or six days go by without a meeting to help the board understand what was going on.” Pyott started every board meeting with an introduction of what had happened in the last five days since they had previously spoken, gave his perspective, and provided an opportunity to give input. Board members were given a daily media roundup of the relative information so “we could discuss the important stuff versus the rubbish,” he says. For many of the board meetings, the members could have from three to 400 pages to read prior. “After the roundup, we’d get straight into the agenda so everyone knew what my game plan was, next moves, and what I needed from them,” he explains.
Some of the meetings would last only an hour or two, but sometimes they could extend to four hours or more if the board was contemplating a major deal or resetting a strategic plan that would, for example, require bank involvement to run the numbers. During the April 29, 2014, meeting, Pyott told the board he needed to spend 90 percent of his time focused on the raiders. “I asked for their approval to pass all the day-to-day management of Allergan to Doug Ingram, president, and Scott Whitcup, EVP and head of R&D,” he recalls. Part of his strategy was to keep the leadership from having to deal with the press with nonoperational matters revolving around the takeover. “I was paranoid about information leaking out,” he elaborates. “I also wanted to be able to monitor what the raiders were up to without the day-to-day distractions of running Allergan.” The other part for wanting Ingram and Whitcup in charge was it provided Pyott the time necessary to formulate a game plan, beginning with the gathering of necessary advisors.
THE VALUE OF STRATEGIC ADVISORS
Any crisis plan should outline which advisors the board has agreed upon to use. In this situation, Pyott says they started with choosing which banks they would look to for advice. “Of course, these are people whom you’ve used for a lot of different work [e.g., licensing, buying] over the years,” he says. “That was an easy choice for us that we had done during our first board meeting.” The board chose Goldman Sachs and Merrill Lynch and also agreed to use the lawyers Allergan had used previously, Latham & Watkins. “Some really good advice that Henri Termeer gave us, having gone through his own acquisition horror, was for the board to consider having its own counsel separate from that of the corporation. So we added Wachtell Lipton, because they usually work on the defense side of things.”
Two other advisors brought in by the board were services Allergan had never had the occasion to secure before: a crisis PR company and a proxy advisor. “Bringing in all of the advisors, even the last two, was done within 14 days of hostilities commencing,” Pyott says. All of the advisors were chosen based on previous experience with board members.
Pyott credits the bankers, lawyers, and PR firm with collectively giving him some very solid advice. “To avoid having people going in different directions or being unclear about deadlines or priorities, they recommended we have a daily call,” he explains. On the call, they would discuss what was going on, what their response would be, and any information the PR firm was hearing from Madison Avenue and in the newsrooms. After that call, Pyott would have another call with a smaller group, including members of management (e.g., CFO, head of investor relations, general counsel, deputy general counsel, PR director) in Irvine, CA, along with about four advisors. They kept the group small to minimize the risk of leaks or email hacks, and they were careful to include only the very senior people from the advisors. Their job was then to coordinate with the rest of their firms on the outside.
In the past, it was usually Pyott, the CFO, or a member of communications who would typically deal with the press. For this crisis, though, they decided early on that Pyott would be the only person who could speak for the company regarding the takeover. The PR firm warned Pyott that he had likely never undergone the type of intense questioning he was bound to encounter from the media in the coming weeks. To help him prepare, the firm would pepper him with questions for an hour while filming his reactions. They would then review the film and repeat the process. “That was very valuable for getting me prepared to answer some of the key questions,” he states.
Making Pyott the point person for any questions regarding the takeover took the pressure off the other senior leaders and ensured only one message was being conveyed. This strategy evidently paid off. “Ackman attempted to have an executive session with the lead director,” Pyott says. “We obviously declined that opportunity. Their game was to try to divide and conquer and to try to get people to say things that could be very regrettable. I even remember hearing about one person who got a call on his cell phone while at home from a hedge fund manager trying to find out information.”
ACHIEVING GROWTH DESPITE BUSINESS CHAOS
One of the keys Pyott credits with successfully staving off the Valeant and Ackman takeover attempt was splitting the team in two — one to deal with the raiders and one to run the daily business of Allergan. “I told Ingram and the operational leaders that I didn’t want them getting distracted, so they would be used very selectively at the boardroom level, often only for explaining any deals we might be looking at ourselves,” he says. “I warned them that there was probably going to be a lot of garbage in the press, but not to believe it all, and certainly not to spend their workdays reading it, because then we would surely fail.”
Pyott empowered Ingram and the operational leadership team to keep the business moving ahead and to make decisions on their own without his input. “I told them that if anything was slowing them down, whether it be somebody not cooperating or just some really difficult decision, then obviously they would be able to get 20 minutes with me. But otherwise, I made sure they knew they had my full mandate to just get it done.” As time went on, Pyott says he spent less and less time with the leadership team. “They did such a great job,” he recalls. “It was pretty amazing that we had the best operating year in our history, growing the company revenues 17 percent while under attack.”
Buying Time During A Hostile Takeover Requires Long Term Shareholder Buy In
When activist investor and hedge fund manager Bill Ackman took to the business world television airwaves on Monday, April 21, 2014, to share his thoughts on why the acquisition of Allergan by him and Valeant (a 38 percent premium) was such a good idea, he was also planting seeds of doubt in the minds of long-term Allergan shareholders. “Word is leaking out in the market of various players who might be competitive here who said to their shareholders that they are not going to bid for the company [Allergan],” said Ackman. David Pyott, the former president and CEO of Allergan, says that when faced with such a situation, time is your friend. “Our banks were very quick to say, play a long game,” he states. “It became very clear to me that because of all the tax savings, being realistic, the only company that could pay more than Valeant would be another foreign company, whether it was really foreign or inverted.” But before you can find a white knight to ride in to save the day, playing a long game requires buy-in from long-term shareholders.
When you do the math, Valeant’s first bid for Allergan was a $10 billion premium from the day that Ackman started buying his first shares. “Investors that wanted us to continue fighting the takeover attempt feared the stock price could go back to where it was before,” Pyott relates. “Four weeks after the first time we met with investors once the hostilities began, they [investors] told us that if we didn’t drive up the stock price and earnings dramatically in the short term, they’d be forced to sell.” To prevent this from happening, Allergan leadership developed a profit improvement plan, which took less than seven weeks, including board approval. “We said we were going to come up with a $475 million run rate of savings by year two, and we actually did way over $500 million,” he says. While R&D is the lifeblood of any biopharmaceutical company, when embroiled in a hostile takeover, you have to be willing to cut — everywhere. “R&D was hit for about 14 percent,” Pyott shares. “We went right across SG&A [selling, general & administrative expenses] cutting, including some of the longer-term market building investments.” Pyott analogizes the process to being able to run faster by just losing five pounds. “We were certainly motivated to lose weight to give us the time we needed to play a long game.”
In addition to the profit improvement plan, Pyott began counseling Allergan’s long-term-oriented stockholders to prevent their positions from falling into the hands of the raiders. “I asked them that if Valeant were to go away tomorrow, where do they think Allergan’s stock price would settle after about day five. I also asked them what they thought the true value of the company was,” he says.
Pyott helped coordinate the investor slide decks that were produced, focusing on why Allergan was a great independent company that was being undervalued, while also attacking Valeant. “In their deal, roughly 60 percent of the consideration would have been equity. People used to scream at me for highlighting that. But one of our highest fiduciary duties as a board on behalf of the shareholders was to point out the value of Valeant paper, because if the deal came to pass, they were going to end up owning it.”
Whether your company is large or small, when a deal like the one brokered by Valeant and Ackman emerges targeting your company, Pyott says to expect an enormous rearrangement of your shareholder base. “If you lose control to the short-term-oriented shareholder base, the game is over,” he relates. “The lesson is that you need to be very well-prepared for the whole investor relations outreach to keep the long-oriented shareholders from selling.” For those who held out, they were well-rewarded for having done so. In November 2014, it was announced that Actavis had agreed to buy Allergan for $219 a share, trumping the Valeant and Ackman deal. But don’t feel too bad for Mr. Ackman. Pyott estimates the activist investor made about $2.6 billion, thanks to his being able to find a white knight in the form of Brent Saunders, the CEO of Actavis, who was willing to pay roughly a $12 billion premium over the last clear formal Valeant/Ackman offer.
Sometimes Business Is Personal
David Pyott, the former president and CEO of Allergan, says people are often surprised when they learn he has never met Bill Ackman, the activist hedge fund investor who attempted to partner with Valeant in a hostile takeover attempt of Allergan. “I talked to him on the phone three times,” he shares. “He was always very quick to point out that he was our largest shareholder. Our third and last phone conversation lasted about 15 minutes. For the first 10 minutes, he laid out his expectations and demands, to which I clearly did not agree. He then threatened me by stating that, if I did not follow his wishes, this would be a sorry way to end my long career. So I told him I didn’t see any reason to meet until he had something completely different to tell me.”
As for Valeant Pharmaceuticals CEO Michael Pearson, Pyott says the last time he spoke to him was in April 2014. “Out of principle, I will never speak to him,” he shares. “The last phone call was merely to reiterate what had been stated in writing publically a few days before. After that, he only transmitted formal acquisition proposals to me by email after a press release had already been issued. He, too, had nothing to add beyond his written statements. I abhorred his business model and principles.”
While some of his standoffishness may appear to be Pyott taking the hostile takeover attempt a bit personal, the reality is limiting his access to Ackman and Pearson was also part of his strategy. “They got me pretty pissed off a couple of times,” he admits. “But you can never lose your cool when you are in front of the TV camera or being caught by the press.” Instead, Pyott sought to find ways to turn Ackman and Pearson against one another. “I tried to cause some major consternation between those two,” he reflects. “Ackman had a different goal in terms of encouraging Pearson to pay a higher price, because for him it was all about the money. I think they started screaming at each about four weeks into the whole process, based on comments from third parties dealing with both of them. I must admit that I used to derive some pleasure from that.”