Canadian company Valeant Pharmaceuticals International Inc. and activist investor Bill Ackman moved forward with their plans to acquire Botox maker Allergan Inc., offering shareholders about $46 billion and touching off what could be a contentious fight.
Several industry analysts said they expect Allergan to reject the offer as too low, and said a fierce boardroom battle may be on the horizon. An issue certain to alarm Allergan is Valient's announced plans to slash research and development spending at the Irvine company.
For a second day, Allergan's stock price shot up sharply, and the company issued a curt reply. The company said its board of directors "will carefully review and consider the proposal and pursue the course of action that it believes is in the best interests of the company's stockholders."
Valeant and Ackman's Pershing Square Capital Management offered $48.30 in cash and 0.83 shares of Valeant stock for each share of Allergan stock. At Monday's closing price, the deal would be worth about $152.89 per share, or nearly $46 billion.
Investors quickly pushed the share price above the offer. Allergan's stock soared 15% on Tuesday's news to $163.65. Valeant shares gained 7.5% to 135.41, increasing the value of its offer for Allergan to $160.69 — 2% below Allergan's closing price.
But there's a lot more at stake here than numbers for the research-heavy company.
Valeant has a reputation for acquiring companies with successful products, then slashing research and development expenses to increase their profitability. If Valeant acquires Allergan, it would very likely do the same, potentially eliminating hundreds or thousands of high-paying jobs in Southern California, several analysts said.
In a news release, Valeant said it would spend "at least $300 million in annual R&D" at Allergan, a 70% reduction from the $1 billion that Allergan spends on its search for new drugs.
"Philosophically, they couldn't be at further ends of the spectrum as to how you build value," said David Maris, an analyst with BMO Capital Markets. "One wants to create the next life-saving therapy, the other wants to create the next Pep Boys, a discount retailer."
Ackman, speaking at an investors' conference, warned Allergan that it would be unwise to reject Valeant's offer. He told investors that Valeant could boost shareholder value by reducing Allergan's research and development expenses. If the deal falls apart, Allergan's stock would plummet, creating a likely shareholder lawsuit, Ackman said.
Still, several analysts said they expect Allergan Chairman and Chief Executive David E.I. Pyott to oppose the initial offer, especially given Valeant's planned cuts.
"It seems inconceivable to us that Pyott and management would allow for the complete dismantling of their company," said Ken Cacciatore, an analyst with Cowen & Co.
Andrew Finkelstein, an analyst with Susquehanna Financial Group, set a $200 price target for Allergan stock — 31% above Valeant's initial offer. He said other companies may try to outbid Valeant, potentially driving up Allergan's price.
In addition to Botox, Allergan sells ophthalmic medication, breast implants and Latisse, a drug that thickens eyelashes. It reported $6.3 billion of revenue in 2013.
Maris, the BMO analyst, has covered Allergan for 16 years, during which time he's seen significant growth. He said he's concerned about Valeant's plans.
"Think of all the lost jobs; these are the types of jobs that companies and economies should want to attract … high-paid skill jobs," he said. "Yes, you can make [better] numbers that way, but you're not building value. In fact, you're destroying value."
He also said he expects Pyott to oppose the acquisition.
"He certainly won't take this lying down," Maris said. "He is diametrically opposed to the philosophy that companies should just be marketing machines and forget about trying to solve the world's great problems in ophthalmology and dermatology."