Here’s an excerpt from this Fortune article:
“I think this ruling will put a substantial chill on activist-corporate team ups,” says John Coffee, a law professor at Columbia University. “The decision contained a sharp rebuke of Ackman’s tactics. My guess is Lipton is very happy they got that.”
What’s more, the judge making the ruling was in the 9th circuit court in California, which is not where key rulings in M&A cases get made, and therefore holds a little less sway when it comes to setting precedent. That’s usually the job of the 2nd Circuit Court of Appeals in New York for federal cases, or the Delaware court system, because that’s where many companies are incorporated, for state cases. Allergan has said it is going to appeal the ruling.
A look at Dykema’s “10th annual M&A Outlook Survey” shows that this year’s respondents remain cautiously optimistic about the economy and the M&A market, but they reveal interesting areas of growth and opportunity, such as:
– China’s drive to open itself up to foreign investment shows, with 45% of respondents expecting an increase in deals outbound from the U.S. to China (up from 22% last year).
– Privately-owned companies will be a core factor of future economic strength, with 82% of respondents expecting an increase in M&A.
– Cash, not economic growth, is the primary factor driving M&A activity—for the first time in two years—according to the survey.
And this survey include 10 years worth of observations, such as:
– In 2005: 51% of respondents had a positive/somewhat positive outlook about U.S. economy; 81% in 2014 saw the future of the M&A market with that same positivity.
– In 2014: 62% of respondents are positive about the U.S. economy; 59% feel the M&A market will be stronger next year.
– In 2005: Technology was the sector respondents felt would fuel the most M&A activity in the coming year.
– In 2014: Healthcare was overwhelmingly the sector respondents felt would fuel the most M&A activity next year.
Here’s news from Wachtell Lipton’s David Katz & William Savitt (and here’s the related WSJ article):
A federal district court today ruled that serious questions existed as to the legality of Pershing Square’s ploy to finance Valeant’s hostile bid for Allergan. Allergan v. Valeant Pharmaceuticals Int’l, Inc., Case No. SACV-1214 DOC (C.D. Cal. November 4, 2014). As we wrote about in April, Pershing Square and Valeant hatched a plan early this year attempting to exploit loopholes in the federal securities laws to enable Pershing Square to trade on inside information of Valeant’s secret takeover plan, creating a billion dollar profit at the expense of former Allergan stockholders that could then be used to fund the hostile bid. Since then, Pershing Square and Valeant have trumpeted their maneuver as a new template for activist-driven hostile dealmaking.
Today’s decision makes clear that the securities laws, and the equities that underlie the ban on insider trading, are not so easily evaded. Ruling on a motion for preliminary injunction brought by Allergan and one of its individual stockholders, Judge David O. Carter of the Central District of California held that there existed serious doubt as to legality of the Pershing Square-Valeant gambit. The judge refused to credit each of the defendants’ technical defenses to insider trading under Section 14(e) of the Securities Exchange Act, holding that Allergan had raised serious questions regarding both whether Pershing Square had taken “substantial steps” to commence a tender offer before it began its trading program and whether Pershing Square could possibly be an “offering person” exempt from the insider trading rules, given that it not purchasing stock in Valeant’s offer and is not bound to participate in Valeant’s offer. The court thus determined that Allergan and its stockholder had “raised serious questions going to the merits of their Rule 14e-3 claim” for insider trading. Judge Carter concluded that the practice was reminiscent of the practice of “warehousing” shares for the benefit of a hostile offer, which the SEC has disapproved as “unfair to investors who are trading at an information disadvantage.”
The Court also found serious questions as to the sufficiency of Pershing Square and Valeant’s public disclosures under Section 14(a) of the Exchange Act. Judge Carter enjoined Pershing Square from voting its shares at Allergan’s forthcoming Special Meeting unless and until it discloses “the facts underlying Defendants exposure to liability” for insider trading and other details of its conduct. The Court declined to consider more searching relief because he found that Allergan did not have standing under Rule 14e-3 (a finding now subject to appeal).
The District Court’s decision indicates that the Pershing Square/Valeant maneuver is not a sustainable blueprint for activist dealmaking. It is neither fair, nor legal, nor responsible corporate law, to allow activist investors to finance hostile takeovers on the strength of ill-gotten profits derived from inside information.
Here’s analysis from Chris Cernich, Head of ISS’ M&A and Proxy Contest Research drawn from ISS’ “M&A Edge Note“:
Statistically speaking, one of the worst strategies for buying a company is to push your hostile bid all the way to a vote of your target’s shareholders. In the past five years, only one hostile bidder which has gone all the way to a shareholder vote – CF Industries – walked away with the prize. In each of the other six contests – including the other one where, like CF, the bidder’s nominees were elected by shareholders – the target remained independent. But this much is already widely known. What is less well-known is how all this has worked out for the potential sellers – not the executives and directors who lead the “Just Say No” defense, but the shareholders themselves who, in five of these six cases, voted to continue saying No.
Measured on an absolute basis, the median cumulative Total Shareholder Return (TSR) for targets which remained independent through Oct. 20, 2014, following an M&A proxy contest was 50.4 percent. But absolute return is a naive view of the issue: the real question is what return shareholders might have had by redeploying their capital into the next best alternative to keeping the target standalone. Relative to those next best alternatives, it turns out, the median return to shareholders of saying No is profoundly negative.
Had shareholders in these six firms sold at the closing price the day before the contested meeting and reinvested in:
– the broader market, as through an S&P 500 Index fund, they would have earned at the median an additional 25.0 percentage points through Oct. 20, 2014; and
– the sector, through a group of close peers, they would have realized at the median an additional 78.4 percentage points through the same date.
In the case of all six of these targets, the underperformance relative to investors’ next-best alternatives began immediately after the show-me moment of the M&A proxy contest, and was generally sustained throughout the first one, three, six, and 12 months after the contested election. At the median, the six firms underperformed the broader market by 2.0, 7.1, 21.5, and 10.6 percentage points over these periods, respectively. Despite mitigating measures like post-contest buybacks, moreover, these firms generally posted negative absolute performance over most of those four measurement periods. Only a small amount of this underperformance appears to have been due to the sector in which they operated. The six targets underperformed the median of their peers, over the same four time periods, by 0.5, 8.4. 14.9, and 13.6 percentage points, respectively.
For the full period from the contested election through Oct. 20, 2014 (which ranged from 2.4 to 5.3 years), three of the six eventually recovered some ground versus the broader market performance. Only two of them – Illumina and AirGas – reversed the negative trend relative to the median of their peers.
What Differentiates Good Bets from Bad?
The conventional wisdom is that giving additional time to a board facing a hostile bid improves the outcome for shareholders. This makes some intuitive sense, if the board uses that time to better inform the market about sources of hidden value: ideally, the target board convincingly demonstrates higher intrinsic value to investors, or wins a more compelling offer after initially saying No, or both, without ever going to a contested vote. For those which do go all the way to a vote yet remain independent, however, the abysmal subsequent returns relative to shareholders’ next best alternatives suggest something in the process has gone awry.
The real question for shareholders looking at this data – or considering their voting strategies in upcoming M&A contests, such as the expected Dec. 18 special meeting at Allergan – is what differentiates the good bets from the bad?
Verifiable Scarcity Value Matters
In only one of the six cases was leaving the company standalone a clear homerun – though in the heat of the contested election, that may not have been so obvious from outside the boardroom. In 2012, Illumina, a leading equipment maker in the nascent DNA sequencing market, faced a hostile tender offer from Roche Holding. Approximately one-third of Illumina’s revenues came from the National Institutes of Health, but in the wake of the 2011 government shutdown, the ongoing uncertainty about the nature and extent of forthcoming federal budget cuts drove a steep decline in Illumina’s stock price. At the point of the shareholder vote, the $51.00 in cash per share which the hostile bidder was offering represented an 88 percent premium to the undisturbed price from six months earlier. It also appeared to represent significant premium when measured by traditional M&A metrics, such as LTM EV/EBTIDA multiples.
Illumina argued, however, that its true value was intimately tied to the development of the broader genetic sequencing market, which it contended was much closer to viability than Roche had argued. As much as the stand-alone strategy held risk for Illumina shareholders, moreover, the risk for Roche of not having Illumina – a market leader already on its way to ubiquity in the first sequencing market, and with all the beneficial network effects that implies – was likely still larger, and should thus drive a much headier valuation. Completely aside from its stand-alone prospects and valuation, Illumina argued, it had significant scarcity value for a strategic bidder–and for this bidder in particular.
The arguments about the potential addressable market, and particularly about the scarcity value of the asset, resonated with shareholders, who overwhelmingly rejected the bidder’s nominees. And though Illumina’s shares did not begin to outperform the next best alternatives – the S&P 500 and the median of its peers – for as much as a year, both arguments have since been borne out in the company’s operating results. As a consequence, saying No–and remaining invested in Illumina as a standalone entity over the subsequent two-and-a-half years – has delivered TSR of 304 percent, significantly outperforming the next best alternatives of the broader market (by 257 percentage points) and sector peers (by 247 percentage points).
Credibility on Business Dynamics Maters
Two years before Illumina, the board at AirGas, the largest U.S. distributor of industrial, medical, and specialty packaged gases, made a similar argument about scarcity value…