Allergan Spurns Valeant's Continued Overtures

Many watchers at the M&A dance have been transfixed by serial acquirer Valeant Pharmaceuticals International Inc.'s pursuit of Botox maker Allergan Inc., of which we first wrote a month ago. Apparently desirous of keeping its R&D virtue intact, Allergan has thus far resisted the repeated advances.

Valeant is a company with a reputation, you see. Although it has upped its offer from $47 to $53 billion, apparently Allergan has heard the stories other companies have told, of being whisked away to other countries with more advantageous tax rates, and having their prized R&D departments stripped away from them, and still doesn't want to be seen on a date with Valeant.

We are told by David Gelles, writing for the New York Times Dealbook, of a frosty lunchroom note from David E.I. Pyott, Allergan's CEO, to J. Michael Pearson, Valeant's CEO, complaining that even the new, improved offer "substantially undervalues" Allergan and "creates significant risks and uncertainties" for its shareholders.

According to Gelles, Pyott also said that Valeant's latest proposal -- $72 in cash and 0.83 of a Valeant share for each share of Allergan -- was not even strong enough to merit deal talks.

"In addition, we do not believe your latest proposal offers sufficient or certain value to warrant discussions between Allergan and Valeant," Pyott said in the letter.

Later, also according to Gelles, Pyott continued his counterattack on Valeant and its stock in an interview. He said that despite the claims of hedge fund manager William A. Ackman, who currently holds about 9.7 percent of Allergan's common stock, top Allergan shareholders were not united in their willingness to sell at a price of about $180 a share in cash and stock.

"Our top shareholders are saying something quite different," Pyott said. "From various ones we've heard numbers that are well north of what Mr. Ackman is using."

It's hard to argue with Pearson's success since, according to the Wall Street Journal, Valeant's stock has risen 848 percent since Pearson took the helm in 2008. But there are those who take issue with his methods.

Jesse Eisinger, also writing for the Times' Dealbook, says that Valeant "runs a serial takeover operation, furiously buying companies and products to propel its growth."

Trouble is, all that buying and reorganizing leads to debt. And, Eisinger wrote, "Adding all of its commitments, Valeant discloses that it has $23.4 billion in debt, a number that's been rising steadily. Its operating cash flow was only $1.3 billion over the last 12 months. That's a low 5 percent coverage ratio. One theory why the company wants to buy Allergan is that the target has lots of free cash flow and little debt."

Like Pyott, we think an attractive prospect like Allergan could do better than that Valeant.

Stephen Levy  is a contributor to Qmed and MPMN.