1.
Define the following:
a. Classified board
b. Poison pill
c. Termination fees
2. Case study:
Arcelor and Mittal Steel, one of the meanest M&A deals ever Arcelor agreed on June 26, 2006 to be
acquired by larger rival Mittal Steel for $33.8 billion in cash and stock. The takeover battle was one of
the most acrimonious in recent M&A history. Arcelor was created in 2001 through the merger of steel
companies in Spain, France, and Luxembourg. In contrast, Mittal Steel, the world’s largest producer of
steel established its position through two decades of acquisitions in emerging nations. Prior to the
Arcelor acquisition, Lakshmi Mittal, a member of an important industrial family in India and CEO of
Mittal Steel, owned 88 percent of the firm’s stock. Mittal Steel acquired Arcelor to accelerate steel
industry consolidation and to reduce industry overcapacity. Combining the firms’ operations would
also mean greater leverage in setting prices and negotiating contracts with major customers.
After having been rebuffed by Arcelor’s president, Guy Dolle, in an effort to consummate a friendly
merger, Mittal Steel launched a tender offer in January 2006 consisting of mostly stock and cash for
all of Arcelor’s outstanding equity. The offer constituted a 27% premium over Arcelor’s share price at
that time. In early February, Arcelor doubled its dividend and announced plans to buy back about
$8.75 billion in stock at a price well above the then current market price for Arcelor stock. Arcelor also
backed a move to change the law in Luxembourg so that Mittal Steel would be required to pay in cash.
This move ultimately failed.
To counter these moves, Mittal Steel said in mid-February that, if it received more than one half of
the Arcelor shares submitted in the initial tender offer, it would hold a second tender offer for the
remaining shares at a slightly lower price. Mittal Steel pointed out that it could acquire the remaining
shares through a merger or corporate reorganisation.
In late 2005, Arcelor bought Canadian steelmaker Dofasco for $5 billion. Mittal Steel was proposing to
sell Dofasco to raise money and avoid American antitrust concerns. Following completion of the
Dofasco deal in April 2006, Arcelor set up a special Dutch trust to prevent Mittal Steel from getting
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access to the asset. The trust would be run by a board of three Arcelor appointees. Mittal Steel
immediately sued to test the legality of this tactic. In addition to this, in a deal with Russian steelmaker
Severstahl, Arcelor agreed to exchange its shares for Alexei Mordashov’s 90 percent stake in
Severstahl. The transaction would give Mr Mordashov a 32 percent stake in Arcelor.
After major shareholders pressured the Arcelor board to at least talk to Mr Mittal, Arcelor demanded
an intricate business plan from Mittal Steel as a condition that had to be met. Despite Mittal Steel’s
submission of such a plan, Arcelor still refused to talk. In late May, Mittal Steel raised its bid by 34%
and said that if the bid succeeded Mr Mittal would eliminate his firm’s two-tiered share structure,
giving the Mittal family shares ten times the voting rights of other shareholders.
A week after receiving the shareholder petition, the Arcelor board rejected Mittal Steel’s sweetened
bid and repeated its support of the Severstahl deal. Shareholder anger continued, as many investors
said they would reject the share buyback. Part of the anger was focused on the fact that the buyback
would increase Mr Mordashov’s ultimate stake in Arcelor to 38% by reducing the number of Arcelor
shares outstanding. Arcelor cancelled a scheduled June 21st shareholder vote on the buyback. Despite
Mr Mordashov’s efforts to enhance his bid, the Arcelor board asked both Mr Morshadov and Mittal
Steel to submit their final bids by June 25.
Arcelor finally agreed to Mittal Steel’s final bid which had been increase by 14%. The new offer
consistent of $15.70 in cash and 1.0833 Mittal Steel shares for each Arcelor share. The new bid was
valued at $50.54 per Arcelor share, up from Mittal Steel’s initial bid premium in January 2006 of $35.26.
The final offer represented an unprecedented 93% premium over Arcelor’s share price of $26.25
immediately before Mittal Steel’s initial bid. Mr Mittal would personally control 43.5% of the
combined firm’s stock. Mr Mordashov would receive a $175 million breakup fee due to Arcelor’s
failure to complete its agreement with him.
Questions
1). Identify and explain the takeover tactics used by the acquirer.
2). Identify and explain the takeover defences used by the target.
3). Was the target’s board and management acting in the best interest of shareholders?
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3. Case Study: Valeant’s takeover battle for Allergan
This case study details the Valeant Phamaceuticals (VRX: TSE) joint takeover bid with Bill Ackman’s
Pershing Square Capital Management, a hedge fund manager, for Allergan Inc (AGN: NYSE) in 2014.
Allergan is a pharmaceutical company, best known as the producer of Botox. The company is research
intensive with significant recent growth. Valeant is a Montreal, Quebec-based pharmaceutical
company listed on the TSX. It is the largest pharmaceutical company in Canada, and the 14th largest
globally, with a business plan based on creating efficiencies in acquisitions of proven products. Valeant
has closed over 100 acquisitions since 2008 and, if successful in acquiring Allergan, could become the
largest Canadian firm by market capitalisation.
However, Valeant would struggle to find the funding to do this deal alone, so partnered with Bill
Ackman, bypassing a large part of the traditional investment banking process and gaining instead
Ackman’s experience in previous hostile investment situations. On a conference call after the deal was
announced, Bill Ackman described his support as a “contractual commitment to support Valeant’s
deal”.
On 22 April 2014 the bid was publicly announced1, following disclosure by Pershing Square of the
purchase of a 9.7% toehold stake in Allergan stock, accrued from February 2014. The Allergan board
rejected the bid, and the subsequent negotiations have been one of the most hostile in recent M&A
history.
Pershing Square’s 9.7% position is critical. On the day of the takeover announcement, Allergan's board
adopted a 12 month shareholder rights plan in its charter. The antitakeover provision would allow
existing shareholders to buy significant equity positions at a discount in the event that any single
shareholder acquires more than 10%. Allergan’s board claimed that this measure would give it a better
opportunity to fully consider any takeover proposals.
Such wording led to unconfirmed reports that Allergan was actively soliciting interest from alternative
acquirers including J&J, Novartis, Sanofi and GSK, as well as Actavis which had failed in a previous
takeover attempt of the target.
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Read more: [Link]
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Share/[Link]
[Link]
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The initial offer from Valeant comprised $48.30 in cash and 0.83 Valeant shares for each Allergan share.
This would result in Allergan shareholders owning a combined post-deal value in Valeant of
approximately 43% in a total deal worth approximately $46bn.
On 28 May 2014 it was announced that Nestlé would purchase the rights to Valeant’s injectable
cosmetic products, giving the world’s largest food and beverage company a toehold in the consumer
medical products space. For Valeant, this side deal removed several potential antitrust concerns that
the Allergan acquisition could raise.
Also at this time, Valeant raised the cash component of the offer consideration to $58.30. The
exchange ratio of the script component was unchanged, and a Contingent Value Right (CVR) was
added related to sales in a particular product ‘DarpIn’2. The cash component was subsequently further
increased to $72 on 31 May 2014. The continued rejection from the Allergan board meant that a
merger agreement was unlikely to pass, and so on 18 June 2014, a hostile tender offer was launched.
Beyond simply rejecting the offers, Allergan had sought to discredit Valeant’s business model and their
investment banking relationships by releasing emails from Morgan Stanley that described Valeant as
a “house of cards” in an attempt to secure Allergan’s business before being recruited to advice to
Valeant.
On 11 July 2014, Pershing Square filed with SEC to seek Allergan shareholder approval for a special
meeting. The agenda for the meeting, scheduled to take place in December 2014, includes the
replacement of six board members with independent directors. In an open letter sent from Bill
Ackman to the Allergan board at this time he described their actions as a “scorched earth response”,
and encouraged Allergan shareholder to vote for the Valeant offer over the stand-alone strategic plan
of the target management.
This happened as Allergan announced a restructuring to the business, including a cut of 13% of global
workforce to further “streamline operations and improve efficiency.” This follows betterthan
expected earnings results for Allergan in 2Q 2014. Allergan chairman and CEO, David Pyott, also used
the earnings release to announce that Allergan was investigating its own acquisition opportunities3.
2
[Link]
Substantially-IncreasesMerger-Proposal-For-Allergan/[Link]
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[Link]
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Allergan had in fact been in talks to acquire third-party pharmaceutical firm, Salix, from mid-July
despite opposition from a number of Allergan’s own large shareholders. If successful in acquiring Salix,
though, Allergan would become prohibitively expensive for Valeant to continue theirdeal.
On 21 July, Valeant lodged formal complaints with both the US and Canadian securities regulators in
response to comments by Allergan about the quality of the bidder’s stock. A key argument against the
deal by the target was that the offers undervalue the target and that Valeant shares are a poor
investment, described as “too risky” and suffering from “serial poor acquisitions, low organic growth
opportunities or strategic planning.” 4 Valeant argued that these statements were “false and
misleading.”
A fortnight later on 1 August 2014, target company Allergan launched their own legal proceedings
against the bidding partners claiming insider trading and disclosure law violations. The central
argument of the lawsuit is that the bidders (specifically Ackman) would have known in advance of the
22 April announcement that Allergan would ultimately be the subject of a hostile takeover, and thus
Pershing Square directly violated federal securities laws which prohibit trading in intended target by
parties with advanced private knowledge. In the filing, Allergan describes the consortium bidders
behaviour as “predatory conduct”5.
Ackman responsed by saying "This is a shameless attempt by Allergan to delay the shareholders'
fundamental right to call a special meeting… Allergan’s determination to waste money on a baseless
lawsuit against its largest shareholder further demonstrates why this board of directors should be
removed."
Recently, Valeant has reaffirmed its commitment to acquiring Allergan with Valeant CEO Michael
Pearson announcing that subsequent bids could be worth more than $200 per share. The deal is
ongoing, with the mud-slinging likely to continue until at least December when we will find out if the
attempt to change the make-up of Allergan’s board by its hostile suitors is successful.
Figure 1: Relative performance, April – October 2014
4
[Link]
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The investment in Allergan by Bill Ackman’s Pershing Square fund, through its 9.7% stake, jumped $1.2bn on
the announcement of the takeover. Pershing Square, as a result, one of the best performing hedge funds
globally for 2014Q2. These concerns were raised publicly at the time of the deal announcement:
[Link]
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1). Identify the key players and sketch out the timeline of significant events.
2). Identify the takeover tactics used by the acquirer. Explain the intended outcome ofeach.
3). Identify the takeover defences used by the target. Explain the intended outcome ofeach.
4). What do you think of Bill Ackman's description of Allergan’s actions as “The most shareholder-
unfriendly defence in the history of corporate America”
5). What factors may affect the success of the Valeant-Allergan deal?
