Dawn raid makes comeback via activist drone strike

April 22, 2014

By Robert Cyran and Richard Beales
The authors are Reuters Breakingviews columnists. The opinions expressed are their own.

Remember the dawn raid, when a would-be acquirer built up a stake before the target realized it was under attack? Activist investor Bill Ackman has come up with a kind of drone strike version. His Pershing Square Capital Management hedge fund and Valeant Pharmaceuticals have teamed up to grab a potential 9.7 percent stake in Allergan, with a hostile takeover by Valeant ready for deployment.

The acquisitive Valeant has reasons to be receptive to such an arrangement. For one thing, it’s essentially the creation of an activist hedge fund, ValueAct Capital, which set it on the path of serial dealmaking. Slashing research and development costs and applying its low tax rate to acquired businesses has served investors well. Its stock is up more than tenfold since it started buying rivals in 2008. The prospect of another deal kicked its shares 10 percent higher after regular market hours on Monday, taking its market capitalization up to $46 billion.

Moreover Valeant, which contributed $76 million to Pershing Square’s Allergan war chest, knew that nearly 10 percent of shareholder votes were in deal-friendly hands before it had to announce its intentions. Ackman has also committed to buy $400 million of Valeant stock at a discount and to hold considerably more for at least a year if the company does manage to buy Allergan.

For his part, Ackman gets to skip the step in which, after buying a stake in a company he thinks is ripe for a shake-up, he then tries to make something happen. Instead he has a ready-made buyer. The result so far is a gain of at least $1 billion on paper – and he hasn’t even yet had to turn cost-effective call options, through which Pershing Square has acquired the bulk of its economic interest, into shares.

A successful outcome isn’t assured for a hostile Valeant offer for Allergan. The two companies compete in the plastic surgery area, so antitrust regulators may ask questions. And after Allergan’s shares popped 20 percent on Monday, it’s now larger than its suitor with a market value north of $50 billion.

There are rules that would have forced a Valeant disclosure much sooner had it started accumulating stock in Allergan for itself. Of course, Ackman is putting up most of the capital and there’s no suggestion anything should have been revealed sooner. Even so, another set of watchdogs may wonder whether this novel battlefield tactic is too stealthy for comfort.

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