Allergan moved to protect itself against the hostile $45.7 billion bid disclosed yesterday by Valeant Pharmaceutical International—with support from the targeted company’s largest shareholder—by adopting a “poison pill” or one-year shareholder rights plan.
Allergan’s board of directors yesterday approved the poison pill, which took effect yesterday, and declared a dividend of one preferred share purchase right for each outstanding share of common stock held by investors.
Under the shareholder-rights plan, stockholders of record at the close of business on May 8 will receive one right for each share of Allergan common stock they held on that date. Distribution of the rights is not taxable to stockholders, and the plan is scheduled to expire 8 a.m. ET on April 22, 2015.
In a statement, Allergan acknowledged the Valeant offer, under which Allergan investors would receive $48.30 in cash and 0.83% of a share of Valeant common stock for each Allergan share they now own. That offer has won support from Allergan’s largest shareholder, investor William Ackman’s Pershing Square Capital Management, which views the Botox maker as undervalued and ripe for cost-cutting.
To that end, Pershing Square has accumulated 9.7% of Allergan stock, Valeant disclosed in a filing yesterday with the U.S. Securities and Exchange Commission—a move Allergan contended it “became aware of” only yesterday.
Allergan said the shareholder rights become exercisable if a person or group owns 10% or more of its common stock, including in the form of synthetic equity positions created by derivative securities. Once that happens, the rights of that person or members of such group become void and unexercisable, while other rights holders are entitled to purchase a number of Allergan's common shares for $500 that have a market value of twice the exercise price of the right.
“The Plan is not intended to prevent an acquisition of the Company on terms that the Board considers favorable to, and in the best interests of, all stockholders. Rather, the Plan aims to provide the Board with adequate time to fully assess any proposal,” Allergan said in a statement.
In a Form 8-K filing today with the U.S. Securities and Exchange Commission, Allergan elaborated: “The rights may also have the effect of assuring that all of the company’s shareholders receive fair and equal treatment in the event of any proposed takeover of the company and to guard against partial tender offers, open market accumulations and other abusive or coercive tactics to gain control of the company without paying all shareholders a control premium.”
“The rights should not interfere with any merger or other business combination approved by the Board of Directors at any time prior to the first date that a person or group has become an acquiring person,” Allergan added.
That has fueled speculation that Allergan may try to resist the Valeant-Ackman bid through a merger or acquisition it hopes will deter the hostile bidders. Allergan
Until the shareholder rights become exercisable, Allergan added, they will trade with the shares of the company's common stock. Allergan said the plan would not affect its reported earnings per share and would not change how its common stock is traded.
“We are disappointed but on the other hand, I think this deal will get done," Valeant CEO Michael Pearson said today in a CNBC interview.
In its announcement of its offer for Allergan yesterday, Valeant said it would undertake “at least $300 million in annual R&D spend to complete future high-probability and late-stage projects” already in Phase III, including current and future line extensions, and life cycle management programs: “The new company will continue to fund both companies' late stage development programs, including those in dry eye, diabetic macular edema, glaucoma, migraine, eye whitening, psoriasis, and other dermatology areas.”
Valeant pointedly added: “The new company will sell or eliminate Allergan's earlier stage programs where Allergan's track record has been largely unproductive over the past 16 years.” That gibes with Valeant’s approach, seen in several earlier mergers, of cutting R&D spending at earlier development phases.