case 8 _ Valeantu2019s Battle for Allergan.docx -...

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Valeant’s Battle for AllerganGroup 8, Section F 1.Why does Valeant wish to acquire or merge with Allergan? Ans:Valeant is a company which uses the inorganic model of growth. Valeant’s CEO Michael Pearson has been a seasoned consultant at Mckinsey and is known as a serial acquirer. In the first six years of his tenure as CEO, he acquired more than 100 companiesand bagged licensing deals. He sought companies which displayed significant synergies and tried to capture them.Allergan has a rich culture of research and development and follows the organic model of growth. Its R&D engine has generated numerous innovative products including the invention of Botox as a cure for wrinkles. It has grown from a small eye-care company to a major pharmaceutical and medical device company. By acquiring Allergan, Valeant will have an R&D engine of its own.Pearson was known for cutting costs and introducing extreme capital discipline in businesses and believed that by cutting unnecessary costs in Allergan, he can increase the value for its shareholders.He also wanted to acquire the specialty pharmaceuticals segment which consisted of products which were high-cost, high-complexity and high-touch which were not in the product mix of Valeant. 2.What potential value does Valeant believe it can create with the merger with Allergan? Ans:Valeant’s CEO Michael Pearson believed in extreme capital discipline in the pharmaceutical industry. He wanted to capture all the synergies between Valeant and Allergan (particularly cost synergies) and focus only on products with the most attractive margins. Valeant was already into wrinkle treatment with Dysport and contact lens solutions with ReNu whereas Allergan has highly popular products like Botox, Restasis and Lumigan. Hence there were significant synergies with respect to product portfolio and customer segments.Also, Valeant wanted to use Allergan as an R&D engine for creating new products. The estimated operating synergies between the two companies was $2.7 billion. Pearson, core to his beliefs, was going to cut the R&D expenditures of Allergan from 17% down to around 3% which was the case with Valeant.
3.Is Valeant offering a premium to Allergan’s shareholders for the change of control? Ans:Valeant proposed multiple offers to Allergan, each better than the previous one. On 21st April 2014, Valeant made a public offer to Allergan’s leadership team to merge the two companies. Valeant proposed exchanging $48.30 in cash plus 0.83 shares of Valeant (at $126/share that day) for each share of Allergan, a total value of $152.88 per share. This was a premium of 31% over Allergan’s stock price of $116.63 on 10th April.On 28th May, Valeant increased the cash component of its offer by $10 per share, from $48.30 to $58.30 per share. This increased the total offer to $166.16 per share, $58.30 in cash and 0.83 shares of Valeant trading at $126.95 per share.On 29th May, Bill Ackman concluded that if the offer price was raised to an effective of $180 per share then the offer would receive support.On 30th May, Valeant increased the offer once more. The cash component was increased from $58.30 to $72 per share. Valeant’s share price had closed at $129.22 the previous day, making the effective offer $179.25 per share, plus the possibility of a contingent value right (CVR) of $25 per share.Hence Valeant was willing to give the shareholders of Allergan a significant premium for the change of control.

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