ALLERGAN CASE ANALYSIS

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I Anirudh Suhag hereby certify that the attached assignment and all materials therein have

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been created by me unless otherwise footnoted and that all the material contained herein

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including charts, graphs and other materials have been created by me.

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Anirudh Suhag, 28 Aug 2020
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216220931
[email protected]

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 Company and Industry Overview
Allergan Inc. (now Allergan plc) was founded in 1948 and incorporated in 1950. It began as an
eye care company by taking advantage of the launch of hard contact lenses, but focused on large
R&D investments, mostly targeted towards specialty pharmaceuticals. The key reason behind
Allergan’s success is that the senior management focuses on long term gains rather than short-
term, which can be clearly seen by their huge investments in R&D, their focus on keeping the
shareholders happy, and the way they treat their employees.
Allergan Inc has had its share of successful acquisitions and spun-offs before it was acquired by
Actavis plc, which show that the leadership team at Allergan was well adept in managing
acquisitions- it was acquired by SmithKline in 1980 and was spun off in 1989; Allergan’s
ophthalmic and contact lens care businesses were spun-off to create a new company Advanced
Medical Optics; Allergan acquired Innamed Corporation, MAP Pharmaceutical Inc and Kythera

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Biopharmaceuticals. The reason Valeant and even Actavis are interested in acquiring Allergan is

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that it has strong financials: revenue growth is higher than industry average of 8.7%, Debt to

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Equity ratio is low(.3), and is below the industry average, gross profit margin is really high, and

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share price has jumped over 106% in the last year.[ CITATION Lin14 \l 4105 ]

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Current Situation:
I will be evaluating the case by taking the position of the BOD of Allergan faced by a hostile
takeover bid from Valeant.
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Valeant is a serial acquirer of specialty drug makers and has offered multiple proposals to
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Allergan to merge the two companies and each proposal is better than the previous one. The last
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offer provided to Allergan is $177 per share, which is a 37% mark-up [see Appendix 2] from the
value of Allergan’s share at the time of the offer.
Considering the hostile takeover bid by Valeant in partnership with Pershing Square, it has
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become imperative for Allergan to take some difficult decisions in a timely fashion. Allergan has
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3 options: (i) stay independent, (ii) accept Valeant’s bid, or (iii) accept Actavis’s offer

Alternative 1 - Reject Valeant’s bid and stay independent

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In an ideal scenario, staying independent is the best option for Allergan as it has excellent growth
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prospects. Considering Valeant’s bid in partnership with Pershing Square, staying single is not
really an option anymore as Bill Ackman bought around 10% of Allergan’s stock prior to Valeant
officially announcing their approach. Later, he even went on to replace six of Allergan’s directors
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to drive through the takeover.

Allergan’s strategy to sue Ackman for insider trading was bound to fail as he was working within
the laws of Insider Trading. He was not holding any fiduciary relationship with Allergan i.e. did
not hold any director or senior officer position in the company. In hindsight, Allergan could have

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 had proper controls in place to manage transfer/purchase of company’s shares, which would have
avoided Ackman to get in a position where he could influence any takeover bid.

Alternative 2 - Accept Valeant’s Bid

The latest offer provided by Valeant has boosted the bid to US$53billion, which is US$177 per
share. Despite the short-term gains, Allergan should not accept Valeant’s bid as the business
model of two companies is totally different. Valeant’s business model is of maximizing
shareholder values by minimizing R&D expenditure and of growing inorganically via mergers
and acquisitions. On the other hand, Allergan focuses on a long-term strategy by investing in
R&D and their employees.
I agree with the approach taken by David Pyott, in rejecting Valeant’s offer right away as the two
companies are fundamentally very different and the merger would not bode well for Allergan’s
future. The merger might look successful in the short term as the share prices will rise, operating
costs would decrease due to a cut in the R&D budget, and they would be able to leverage the

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products which are already in the R&D pipeline. But in the longer run, Valeant would not be

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successful in the pharmaceutical industry due to a lack of funding in R&D.

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Implication of hostile takeover for the BOD – The BOD plays a central and important role in

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determining the result of a hostile bid. The board is legally bound to look out for the
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shareholders interest, but in such a case each member of the board might perceive the interest
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of shareholders differently. In the current situation, the board members who would vote in favor
of the merger, would reap benefits in case of a successful takeover bid and the ones against it
might be ousted without any compensation.
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Alternative 3 - Accept Actavis’s offer – Recommended plan of action

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I totally support Allergan’s strategy of looking for other potential companies that would be
interested in acquiring Allergan as it is the need of the hour to save the company from getting
acquired by Valeant with its unethical tactics. Allergan was successful in getting a bid from
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Actavis which was US$40 a share more than Valeant’s biggest bid.
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My recommendation would be that Allergan should accept the bid made by Actavis as this
acquisition would result in one of the fastest growing global pharmaceutical company. The
merger with Actavis would create synergy and help achieve long term sustainable growth while
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maximizing shareholder value as both companies invest heavily in R&D. The deal will also
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result in growing product portfolios and would extend the companies reach across global
markets. [See Appendix 1 to view the decision criteria to evaluate the alternatives]
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In conclusion, Allergan is now in damage control mode and does not have the option to stay
independent. Although Allergan should have had controls in place to avoid any external
shareholder to get in a position where Bill Ackman is, they have managed to handle the situation
effectively. Allergan was successful in getting a much higher bid in from Actavis within a very
short span of time, which helped them avoid their takeover by Valeant, which would have been
catastrophic to the company.

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 Appendix
Appendix 1 – Decision Criteria for evaluation alternatives

Takeaway: It is important to evaluate the alternatives based on multiple decision criteria.

As per my assessment of the alternatives, I would recommend Allergan to accept the bid
from Actavis as it not only is viable in the long term, but also keeps the shareholder and
employees happy.

Criteria Stay Independent Accept Valeant’s Bid Accept Actavis’s Bid

Long Term Pros: Cons: Pros:

Viability - Would be the best-case - The ideology and strategy of - Avoid getting acquired by

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scenario as company’s focus has both the firms are totally Valeant
always been on R&D different and it will not bode well - Generate synergy as the

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Cons: for Allergan if they accept strategies of both

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- This is not feasible in the Valeant’s bid. companies are in sync

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current scenario as Bill Ackman - Valeant’s lack of focus on R&D - Global expansion
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has purchased 10% of the shares will not be sustainable in the Cons:
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and is in a position to influence pharmaceutical industry in the - Lose their own identity
the takeover longer run - Might receive flack due
to the negative publicity
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due to the situation with

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Valeant
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Shareholder Pros: Pros: Pros:

Value - Allergan has shown good - Immediate rise in the share - Maximum short-term
growth in the past and is value in case of a merger gain out of the three
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projected to do well in the Cons: alternatives

future as per Pyot - The share price is bound to fall - The long-term prospects
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in the future as Valeant’s also look good as the

business model of not investing strategy of both
in R&D is highly likely to fail in companies are aligned
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the pharmaceutical industry - Strong combined balance

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Employee High Low Medium

Satisfaction Allergan has always focused on The employee morale would be Even though the strategy
keeping their employees’ low as directors would be of the companies is
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content by maintaining replaces, R&D team would be cut aligned, there would be a
transparency and treating short and company direction change in leadership,
everyone with respect would change which might create some
uneasiness in the
employees.

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 Appendix 2 – Shareholder Value for each offer
Takeaways:
1. It is clear that Allergan was a good investment as it’s share prices were on a rise
2. Valeant was desperate to takeover Allergan, which can be seen be the three offers
3. Actavis offered a bid that Valeant could not match and hence winning the race to acquire Allergan

Allergan share price

at the time of offer Value per share offered % increase in shares
Valeant Offer 1 $116.00 $153.00 31.90%
Valeant Offer 2 $126.00 $163.00 29.37%
Valeant Offer 3 $129.00 $177.00 37.21%
Actavis Offer $198.00 $219.00 10.61%

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Bibliography

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Ingram, L. (2014). Allergan (AGN) Stock Gains After Actavis Bid. The Street, 2.

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