And The Winners Are Actavis, Allergan And Ackman

11.17.14 | Forbes

By Steve Brozak

To read the entire article on Forbes, please click here.

With White Knight Actavis standing in its corner, Allergan was able to outmaneuver Valeant Pharmaceuticals and Bill Ackman’s hedge fund, Pershing Square Capital, breaking a seven-month siege of the company.  Earlier this morning on CNBC, the CEOs of Actavis and Allergan appeared on the financial network to extoll the virtues of the picture perfect arrangement between the two companies. I expect this deal to be added to the annals of business school case studies very quickly. What really sets this attempted takeover apart from the classic cases we study is the surprise partnership that emerged between a publicly traded company, Valeant, and a private hedge fund, Pershing Capital. It was a creative and intelligently designed approach that will surely raise the bar of activist investing.

While Valeant/Ackman didn’t have the winning bid, they didn’t lose either. Clearly Allergan and its shareholders win with the deal valuing the company and its shares $11BN more than Valeant/Ackman’s current bid, and $18.5BN more than their initial $47BN bid back in April. But Mr. Ackman also emerges as a winner.

The deal in April was announced when Mr. Ackman’s holdings in Allergan reached 10%, a magic number forcing him to disclose and track movements in his holdings of Allergan stock. Once an institutional investor reaches the 10% threshold, the market begins to speculate on the holder’s intentions, especially if the holder is a known activist. In this case Mr. Ackman’s intentions became immediately clear when he and his partner, Valeant, announced their intentions to acquire Allergan.

On average Mr. Ackman purchased his position for $129.28 per share before April 2014. Since then, the share price has increased 70%, bringing the total value of his position to over $6.3BN. Mr. Ackman and his hedge fund stand to clear $2.6BN in profit after the acquisition of Allergan by Actavis. Under the terms of their partnership, Valeant is entitled of 15% of Pershing Capital’s gains from the trade in a failed attempt, netting Valeant $390MM. And even though Valeant/Ackman failed to achieve their first goal of an outright acquisition of Allergan, they are now battle tested and will likely be ready to pursue other deals.

Wall Street enjoys using creative titles for its M&A maneuvers.  Much of it is wrapped in warlike imagery because business can be war. In this case Allergan was in need of a White Knight to be its champion to fend off a hostile takeover. Pitched in battle, Valeant/Ackman remained steadfast in their assault of Allergan, all the while having established a framework for their alliance that ensured a high probability for profit whether they were successful or not in their campaign. They just needed to remain patient and engaged. In War and Peace, Leo Tolstoy wrote that time and patience are the champions of war. They can also be the champions of Wall Street.