(The opinions expressed here are those of Alison Frankel, a columnist for Reuters.)
By Alison Frankel
NEW YORK (Reuters) - Earlier this week, I told you about new filings by the Canadian pharmaceutical company Valeant and the hedge fund Pershing Capital that suggested their target Allergan had disregarded advice from its financial adviser Goldman Sachs.
The Pershing and Valeant briefs were heavily redacted and the underlying exhibits were sealed, but the implication from unredacted snippets was that Goldman had suggested Allergan request accounting information from Valeant and Allergan rejected the recommendation. Then, according to Pershing and Valeant, after Goldman refused to go along with attacks on Valeant’s business model, Allergan hired additional experts with no such reservations.
Much of the once-sealed evidence in the case is now public. It’s must-read stuff for M&A buffs - an unusually robust account of one of the most innovative and celebrated takeover battles I can remember. But I don’t see much in the emails or testimony to prove that Allergan refused to follow Goldman’s advice to engage with Allergan.
‘VALEANT IS VILE’ There are definitely some headaches for Allergan in the newly disclosed emails, including one from CEO David Pyott to Allergan corporate development vice president David Lawrence, summarily rejecting Lawrence’s suggestion that Allergan tone down a presentation entitled “Valeant Is Vile.”
Lawrence subsequently emailed Allergan’s CFO, describing how Pyott had “paddled” him for objecting to the presentation and how he’d since been excluded from directors’ meetings and consultations with Allergan’s financial advisers. (Lawrence also sent a copy of his original email to Pyott to his personal email account, an interesting move.)
There’s also some new evidence to back up Pershing chief William Ackman’s claim that Allergan deliberately set out to drive down Valeant’s share price as part of Allergan’s defense against the hostile bid.
As far back as March 2014 - before Valeant and Pershing even surfaced with an unsolicited bid for Allergan - Allergan was modeling negative forecasts for Valeant, according to an internal email.
By June, with Allergan’s anti-Valeant campaign underway, Allergan CEO Pyott was “taking credit” for a $5 drop in Valeant shares, according to an exchange between the Allergan CFO and an adviser from Bank of America Merrill Lynch.
The next month, Pyott asked M&A adviser Innisfree for a list of Valeant’s top shareholders, presumably in connection with what Pershing and Valeant have described as Allergan’s “highly unusual” roadshow to convince Valeant shareholders to oppose the takeover bid.
And in a July 14 presentation to the Allergan board, Allergan’s bankers at Goldman Sachs and Merrill highlighted the fall in Valeant’s share price - to below its levels preceding the Allergan offer - as a sign of the success of Allergan’s tactics.
But let’s get back to the Pershing and Valeant representation in filings this week that Allergan rejected “Goldman’s recommendation to ask for information from Valeant” and “disregarded input” from its outside advisers about Valeant’s business model.
GOLDMAN‘S “WHITE HAT”
There is no smoking-gun Allergan email to back that assertion. On May 19, a Goldman banker sent Merrill counterparts and Allergan officials an email describing Tenet Healthcare’s fraud suit against Community Health Systems, which was part of Tenet’s defense against Community’s hostile takeover bid.
Tenet had obtained the information at the heart of its suit through a non-disclosure agreement, the Goldman email said. Goldman seemed to intimate that Allergan might be able to pull off a similar coup.
If Allergan were actually to begin negotiations with Valeant, the email said, “we would have the opportunity to do real, detailed due diligence of V as well. We would also insist in the NDA that we have the right to make our findings public to our shareholders as fiduciaries. V may never agree to this, which in and of itself would be telling.”
Is that really a recommendation to request information from Valeant? It seems more like a hypothetical to me. I didn’t see any subsequent reference to the non-disclosure agreement idea, though in a separate email chain with a different Goldman banker the same day, Allergan’s CEO said, “I need Goldman to take off its white hat and put on a darker one.” (The Goldman banker responded, “I hear you!”)
Pershing and Valeant claimed that Allergan’s “Valeant Is Vile” presentation was vetted by Allergan accounting advisers Alvarez & Marsal and FTI Consulting because Goldman Sachs and Merrill refused to go along with Allergan’s criticisms of Valeant.
(Both banks had been bullish about Valeant in recent analyst reports, and Goldman was the sole underwriter in a $2.3 billion Valeant stock offering in 2013, in which it invested $300 million in Valeant shares.)
But when Pershing lawyer Mark Holscher of Kirkland & Ellis asked Pyott during the CEO’s deposition about Goldman’s view of the “Valeant Is Vile” Powerpoint, Pyott refused to concede that Goldman had any problem with it.
“I think the word ‘approve’ is wrong, because at the end of day, the only person who puts out the presentation is ourselves,” Pyott testified. “Obviously if they had some form of objection, I would be listening carefully.”
Holscher directly asked Allergan’s lead director, Michael Gallagher, if Goldman and Merrill told him Valeant had an unsustainable business model. “They agreed that it did, yes,” Gallagher replied.
Holscher also asked whether Allergan had considered a non-disclosure agreement to obtain information from Valeant. Gallagher said no: That request would have sent the wrong message to the marketplace and, besides, Allergan already knew plenty about Valeant’s business model.
(Allergan’s shareholders may be wondering why the company is paying $6 million a quarter for financial advice to both Goldman and Merrill - according to Holscher’s questions to Gallagher - if its board already knows everything it needs to know about Valeant’s business, but that’s another story.)
Allergan shareholders, as you know, are weighing Pershing proposals to oust six board members and begin talks with Valeant. Both sides seem to believe that the more mud they can throw at the other, the better their chance of winning the proxy fight.
Allergan says Pershing is an inside trader and Valeant is a company with an unsustainable business plan. The hostile bidders say Allergan’s board members are breaching their duties to shareholders in a desperate effort to save their own jobs.
Bill Ackman said in his deposition in the Allergan litigation that he doesn’t like to describe unsolicited offers as “hostile” bids, preferring to call them “happy deals” because “there are very few unhappy shareholders when a company makes a public proposal to acquire a business.”
I‘m sure the arbitrageurs who have bought Allergan shares since the Valeant offer last April have been happy to see the upward trend line of the company’s share price in the last six months.
But when you’re caught in the middle of a mud fight, you can’t help feeling a little dirty.
Reporting by Alison Frankel. Editing by Ted Botha.