There was no sight of any frown lines on the forehead of activist investor William Ackman over the past two months as he quietly bought up almost 10 per cent of specialty healthcare company Allergan.
The 48-year-old hedge fund manager is clearly trying to keep it that way as he partnered up with Valeant Pharmaceuticals this week to launch an audacious $US46 billion hostile bid for the maker of Botox.
The unsolicited offer shocked Wall Street, which is used to activist investors visibly creeping up the share register and at least agitating for change before making such a bold move like swallowing a company whole.
But the Canadian-based Valeant is determined to become one of the world’s five largest healthcare companies. The acquisition of Allergan, which like Valeant is currently worth more than $US40bn, would ensure that.
Once Valeant showed its hand, valuing Allergan at about $US152.89 a share, a market frenzy ensued. Allergan shares immediately jumped 16 per cent to $US164.21.
The fact that the market is pricing Allergan higher than the offer price indicates there is no shortage of speculators out there who believe there will be at least one white knight that sees the value of a little Botox for their company.
But don’t write off Ackman and Valeant’s CEO Mike Pearson just yet. Both have a reputation for being savvy and brutal when it comes to mergers and acquisitions.
This is what makes the offer so interesting. It isn’t just the dollar signs attached or because it has the potential to play out a number of different ways. What’s more intriguing is how the bid could be done under the cover of darkness.
Pearson targeted Ackman knowing that they could use his hedge fund Pershing Square Capital Management to go under the radar and accumulate shares in Allergan without anyone knowing.
Under US securities law, hedge funds are able to buy up to five per cent of a company and still have 10 days before they have to make any public disclosure. Pearson would have had a much shorter head start had he bought the stake through Valeant due to reporting requirements.
Regulatory filings show that Ackman started buying Allergan stock on February 25 and then in March switched to over-the-counter call options -- which are not listed on an exchange -- to accumulate his stake.
He took a bit of a rest on April 9 and 10 to drive down the share price before jumping in again on April 11. By the time his spending spree was over -- 9.7 per cent of the company belonged to him.
Knowing full well the sneaky move to buy the Botox-maker would be scrutinised, Ackman has come out swinging this week against claims of insider trading.
“The way the insider-trading rules work is you can’t trade on material non-public information if you are breaching a duty of confidentiality or some other duty you have to the person you received the information from,” he told Fox Business.
“What we are doing here is we’re partnering to assist Valeant in acquiring Allergan. Mike (Pearson) shared with me their interest in Allergan -- there was no breach of a duty. In fact, Mike, as the CEO of Valeant, said it was in the best interest of Valeant to share with me their interest in Allergan for the purpose of working on the transaction.”
No doubt he did. So much for transparency.
Ackman says he consulted with Robert Khuzami, the former head of enforcement at the SEC, to ensure the regulator wouldn’t have cause to come after him for insider trading.
And while Khuzami and Ackman have no doubt done their homework from a legal protection standpoint, it surely is a loophole that SEC chair Mary Jo White should take a look at.
Insider trading is hard to prove because there are few laws around it. What constitutes insider trading is usually decided on a case-by-case basis. It rotates around the notion of whether someone was operating in the market on information that is not available to the public. In this case, Ackman was certainly doing so.
For Pearson, nothing quenches his corporate thirsty more than a juicy takeover. Since he took the corner office at Valeant in 2008, the company has spent more than $US19bn on acquisitions. He says proudly that since 2010, Valeant has been gobbling up about 25 companies a year.
A tie-up with Allergan would position Valeant as the market leader in skin care and eye care products.
Since the takeover offer Allergan has employed what is known as a 'poison pill' defence.
Otherwise known as a 'stakeholder rights plan', it means that if the stake of any investor surpasses 10 per cent, all other shareholders will have the right to purchase company stock at a deeply discounted price. So shareholders could purchase one discounted share for each share they already own and double their stake in Allergan.
With Ackman holding a 9.7 per cent stake, it effectively stops him from buying any more because it drives down the value of shares.
But this defence will only hold for so long. What is most likely here is that Allergan will be forced to look for a white knight.
Of them, GlaxoSmithKline would probably be the best fit. The company already sells Botox in Japan and this week announced a series of deals with Novartis worth about $US20bn that will further boost its consumer health portfolio.
But Glaxo chief executive Andrew Witty doesn’t quite do business the same way as Pearson and Ackman.
"M&A is a strategy to be used sparingly," he told reports on a Tuesday conference call. "But it has an extremely valuable role to play if you can find targeted transactions which allow you to strengthen in the places where you have long-term competitive advantage."
Novartis could be another eligible suitor given its desire to boost its skin care offerings.
Then there is Johnson&Johnson which only last week shelved long-held plans to pursue a new anti-wrinkle drug, PurTox, in an effort to break Allergan’s 85 per cent market share in the area. Given PurTox looks dead in the water, now would be a great time to make a play for Allergan.
In the absence of a white knight, Allergan could have one trump card left to play: it could make its own deal. Analysts believe a takeover of Irish drug maker Alkermes would give Allergan the chance to re-locate to Ireland and lower its relatively lofty 27 per cent tax rate as well as provide it with a portfolio of products.
Allergan is not the only one who should move fast, though. Mary Jo White and the SEC should put Ackman's and Pearson’s maneuvre to the test and provide an explanation to the market as to why their Botox plan shouldn’t raise eyebrows.
Mathew Murphy is a Walkley Award-winning journalist based in New York.