Perrigo shows danger of overplaying M&A defense

September 13, 2016

The author is a Reuters Breakingviews columnist. The opinions expressed are his own. 

A hostile hangover makes fertile turf for an activist investor. Perrigo fought off Mylan’s$26 billion offer last year, in part by making excessive promises about how well the company could perform on its own. Since then, the drug company has lost almost half its value. Such sluggish performance has prompted activist investor Starboard Value to dive in with a 4.6 percent stake and a bunch of demands.

During its battle, Perrigo confidently said it would earn $9.30 a share in 2016 – a 22 percent increase from the previous year. That and a $2 billion share repurchase plan meant there was no need for investors to gamble on an offer by the interloper. Shareholders took management’s side and voted Mylan’s proposal down.

Since then, prices have been falling faster than expected, hitting Perrigo’s generic-drug business. Synergies from a past deal have been slow to arrive. And its over-the-counter drug business is finding it harder to grow against a revitalized Johnson & Johnson. Perrigo now thinks it will earn about $7 per share in 2016 and has suspended share buybacks to pay down debt.

It’s a familiar refrain. Companies under threat by outsiders make promises that are too rash, buff margins through unsustainable tactics like tweaking the tax rate, or engage in poor acquisitions in an attempt to make themselves an unsavory mouthful.

AstraZeneca, for example, fought off a $118 billion bid from Pfizer in 2014 by promising it would raise sales by more than 70 percent by 2023. Instead, sales are falling. DuPont successfully fought off activist Nelson Peltz’s Trian last year, only to announce disappointing results, the departure of its chief executive and then a combination merger-spinoff with Dow Chemical. Mylan has had problems, too: investors’ questioning the durability of its profits has left it worth half the $22 billion Teva said it was willing to pay for it in another 2015 hostile deal.

Activists can have an edge in forcing such companies to change. Starboard’s stipulation that Perrigo focus on its profitable over-the-counter business is a good recipe for turning around the company. Moreover, Perrigo’s recent wobbles have eaten away at investor trust in management – so shareholders may be willing to give Starboard a try. Other companies with Pyrrhic victories against hostile bidders may be similarly vulnerable.

 

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