Liberty Posted November 17, 2014 Share Posted November 17, 2014 It is good to walk away than overpay. There will be other opportunities in future. Exactly. Here's what I wrote in my investing journal this morning: What we have to remember is that this was never about ‘winning’ the deal or ‘losing’ it, but about creating per share value for shareholders. So at a certain price, it’s worth it, and at a certain price, other alternatives for capital deployment are more attractive. It’s a very good sign to see this discipline to step on their egos and to walk away when that line is crossed (or to not come close to that line, even if nice value could have been created at those prices; better to keep a margin of safety in case things don’t go according to plan - that's probably why they always over-deliver on synergies, because they have a nice MoS built in). Maybe the media will see it as ‘losing’ , but that doesn’t matter. (who lost anyway? Ackman made a ton of money, Pearson mostly spent time on something that could have been transformational if it worked but doesn’t really penalize the business if it didn’t, so that was nicely asymmetrical. And I’m sure he and his team learned a ton in the process so next time will be different. The saga also has the side-benefit of having shown everybody that VRX isn’t easily dissuaded once it sets its sights on something, and its model and financials have been publicly battle-tested and scrutinized in a way that few companies have been…). Now it’ll be interesting to see how VRX is priced by Mr. Market since a big uncertainty has been lifted and arbs who bought AGN and shorted VRX will have been covering lately. It’ll be priced more on fundamentals, which should be interesting. The only thing I’m sad about is that the AGN management wasn’t kicked out unceremoniously like bums as a warning to other shareholde-unfriendly managements, but you can’t have everything… Link to comment Share on other sites More sharing options...
KCLarkin Posted November 17, 2014 Share Posted November 17, 2014 It is good to walk away than overpay. There will be other opportunities in future. Roll-ups usually get in trouble when they do a big, bad deal. I like the discipline here. Link to comment Share on other sites More sharing options...
giofranchi Posted November 17, 2014 Author Share Posted November 17, 2014 The only thing I’m sad about is that the AGN management wasn’t kicked out unceremoniously like bums as a warning to other shareholde-unfriendly managements, but you can’t have everything… As much as I despised how they have behaved… I must admit in the end they succeeded in making their shareholders the most money possible… Therefore, my feelings about AGN management are mixed right now… ::) Gio Link to comment Share on other sites More sharing options...
Guest wellmont Posted November 17, 2014 Share Posted November 17, 2014 The only thing I’m sad about is that the AGN management wasn’t kicked out unceremoniously like bums as a warning to other shareholde-unfriendly managements, but you can’t have everything… As much as I despised how they have behaved… I must admit in the end they succeeded in making their shareholders the most money possible… Therefore, my feelings about AGN management are mixed right now… ::) Gio they had no choice. they were forced into selling. if vrx had not come along, they would not have done anything for shareholders. it would have been business as usual. so now agn management will take all the credit. I don't give them one ounce of credit. Link to comment Share on other sites More sharing options...
Liberty Posted November 18, 2014 Share Posted November 18, 2014 The ink isn't even dry on the ACT-AGN deal, and already there are rumors that VRX could make a $68 bid for TEVA. Might be totally unfounded, we'll see. Link to comment Share on other sites More sharing options...
giofranchi Posted November 18, 2014 Author Share Posted November 18, 2014 The ink isn't even dry on the ACT-AGN deal, and already there are rumors that VRX could make a $68 bid for TEVA. Wow!! ;) But why not concentrate their energies on private companies?... The health care private market is still huge, and given the recent ordeal with Allergan, it would be probably much easier to close 3 medium sized acquisitions of private companies, than one big deal with a public company… Do VRX shareholders really want another fight like the one just ended? ??? Gio Link to comment Share on other sites More sharing options...
Liberty Posted November 18, 2014 Share Posted November 18, 2014 Wow!! ;) But why not concentrate their energies on private companies?... The health care private market is still huge, and given the recent ordeal with Allergan, it would be probably much easier to close 3 medium sized acquisitions of private companies, than one big deal with a public company… Do VRX shareholders really want another fight like the one just ended? ??? Gio This might be what they do. Or buying assets from large public companies rather than trying to buy the whole thing. Or a lot of smaller 1-5bn deals. Probably a mix. But they only have to succeed with one of these big public companies at the right price to totally transform the company. If it was a good idea with Allergan, then it's a good idea to keep trying with others that have similar mixes of good assets and bloated structures. Maybe if they can just find a board that will actually meet with them and do DD, they can convince them without a big fight. VRX are decentralized enough that these attempted mergers don't seem to disrupt operations too much (they've had great operational results the past few quarters), so cost seems fairly low vs. a big upside if it works. The main costs seem to be 1) Management's energy & time, and 2) being locked out from most other deals while waiting to see if the merger works. #1 seems worth it because this isn't some CEO pet project that won't move the needle, it's a potentially very value-creating deal, and #2 isn't too bad because while that slows growth, it also allows the company time to strengthen its balance sheet and show the world that non-GAAP converges with GAAP in the right direction when they stop acquiring. Link to comment Share on other sites More sharing options...
original mungerville Posted November 18, 2014 Share Posted November 18, 2014 I agree completely Liberty. All of these options are good options. Bunch of small $1-5 billion deals or one big one. I think a big deal would likely be with an acquiree that has a strong balance sheet - ie low debt to equity especially relative to VRX, so a big deal should help the balance sheet while also increasing earnings per share from synergies. Otherwise, I think they would stick with smaller deals using yearly cash flow to finance them. Link to comment Share on other sites More sharing options...
giofranchi Posted November 18, 2014 Author Share Posted November 18, 2014 I agree completely Liberty. +1! ;) Cheers, Gio Link to comment Share on other sites More sharing options...
peter1234 Posted November 18, 2014 Share Posted November 18, 2014 Issue with smaller deals is that it is about the same amount of work to get the transaction and integration done as it is for a big deal. If you are in hurry to grow, it is much easier and faster with big deals. As has been pointed out before, price and execution risk are higher with big deals. Also, Pharma deals are much more popular again so deals don't come cheap at the moment. Link to comment Share on other sites More sharing options...
original mungerville Posted November 18, 2014 Share Posted November 18, 2014 Personally, VRX's debt to equity levels are at or near a maximum level for me to be comfortable. Much much more importantly, other large shareholders have voiced the same concern - eg, Sequoia Fund, their largest shareholder. This is the reason for the above comments. But what is important is mathematically, just investing yearly cash flow at an IRR of 20% in acquisitions means cash flow will grow at 20% annually. So if cash flow is $3 billion, that $3 billion can double in 4 years with just one $3 billion acquisition a year. The transformative large one will come at some point, this year, next or some other year - so we are just really talking about timing and sequencing (between small and large acquisitions) which shouldn't impact the buy decision that much given the baseline small acquisitions can grow earnings 20% all by themselves... and that does not even include any underlying organic growth. Its hard to see how earning power doesn't double every 3 years, and the stock price should follow from these levels. Link to comment Share on other sites More sharing options...
Liberty Posted November 18, 2014 Share Posted November 18, 2014 Another part of the dynamic is that if VRX stock reprices up significantly in the meantime, up to a point that Pearson feels it's at least fairly valued if not overvalued, they might be able to do a big merger of equals or mid-sized transactions using more stock, and thus delever more quickly. The main reason they piled up so much debt is that so far they felt their stock was undervalued (and they were right). Link to comment Share on other sites More sharing options...
fareastwarriors Posted November 18, 2014 Share Posted November 18, 2014 The Flaws in Valeant’s Activist Deal Effort http://dealbook.nytimes.com/2014/11/18/the-flaws-in-valeants-activist-deal-effort/?module=BlogPost-Title&version=Blog%20Main&contentCollection=Breakingviews&action=Click&pgtype=Blogs®ion=Body Link to comment Share on other sites More sharing options...
loganc Posted November 18, 2014 Share Posted November 18, 2014 The main reason they piled up so much debt is that so far they felt their stock was undervalued (and they were right). I think this is a key point. VRX has done an enormous number of deals with what I consider to be very modest increase in share count. Given the fact that I believe they have done good deals, I see it only as a positive from an equity holder perspective. Take all you can get from the debt markets in the current environment and don't dilute my equity. Also, I don't understand how the media totally gives AGN mgmt a pass on taking the ACT currency when they have done a ton of deals as well and all of the same non-GAAP adjustments apply to ACT. ACT has a less levered balance sheet, but I don't see it as some crazy difference - something like a turn lower at this point? Link to comment Share on other sites More sharing options...
cayale Posted November 18, 2014 Share Posted November 18, 2014 The main reason they piled up so much debt is that so far they felt their stock was undervalued (and they were right). I think this is a key point. VRX has done an enormous number of deals with what I consider to be very modest increase in share count. Given the fact that I believe they have done good deals, I see it only as a positive from an equity holder perspective. Take all you can get from the debt markets in the current environment and don't dilute my equity. Also, I don't understand how the media totally gives AGN mgmt a pass on taking the ACT currency when they have done a ton of deals as well and all of the same non-GAAP adjustments apply to ACT. ACT has a less levered balance sheet, but I don't see it as some crazy difference - something like a turn lower at this point? The only difference is ACT isn't going to cut like VRX would have. Pyott just wanted to keep the company together. He got the best of all worlds- a higher offer and a company left relatively intact. I am surprised he got away with it and that ACT came in over the top. Link to comment Share on other sites More sharing options...
peter1234 Posted November 18, 2014 Share Posted November 18, 2014 The main reason they piled up so much debt is that so far they felt their stock was undervalued (and they were right). I think this is a key point. VRX has done an enormous number of deals with what I consider to be very modest increase in share count. Given the fact that I believe they have done good deals, I see it only as a positive from an equity holder perspective. Take all you can get from the debt markets in the current environment and don't dilute my equity. Also, I don't understand how the media totally gives AGN mgmt a pass on taking the ACT currency when they have done a ton of deals as well and all of the same non-GAAP adjustments apply to ACT. ACT has a less levered balance sheet, but I don't see it as some crazy difference - something like a turn lower at this point? The only difference is ACT isn't going to cut like VRX would have. Pyott just wanted to keep the company together. He got the best of all worlds- a higher offer and a company left relatively intact. I am surprised he got away with it and that ACT came in over the top. Agree. Quite amazing if you think about it: Paying more with lower cost & tax reductions. Makes the deal much less compelling for the acquirer. Link to comment Share on other sites More sharing options...
Liberty Posted November 18, 2014 Share Posted November 18, 2014 Ackman and Pearson said negative things about AGN's management and board when they realized that they weren't even willing to meet them, so they felt they had to explain to AGN shareholders directly why the board and management had to be thrown out. Pyott and his buddies probably didn't like that at all. I think a lot of what ensued was personal and about saving face. It's not like management or the board are big shareholders, and they were selling at less than half the current price. If this was only about maximizing value, there's a million things they could have done years ago... But they certainly couldn't go out in disgrace. ACT has a model fairly similar to VRX, but they never said anything bad about Pyott and the board, so they're quite ok to them. That's my impression, anyway. Link to comment Share on other sites More sharing options...
loganc Posted November 19, 2014 Share Posted November 19, 2014 Ackman and Pearson said negative things about AGN's management and board when they realized that they weren't even willing to meet them, so they felt they had to explain to AGN shareholders directly why the board and management had to be thrown out. Pyott and his buddies probably didn't like that at all. I think a lot of what ensued was personal and about saving face. It's not like management or the board are big shareholders, and they were selling at less than half the current price. If this was only about maximizing value, there's a million things they could have done years ago... But they certainly couldn't go out in disgrace. ACT has a model fairly similar to VRX, but they never said anything bad about Pyott and the board, so they're quite ok to them. That's my impression, anyway. My comment was more towards the media coverage. I can understand Pyott et al. embracing ACT at the end. I mean, look at the ACT financial statements. Obviously, you aren't getting anywhere with GAAP accounting there. Zero mention of that from the media coverage of the ACT-AGN deal as far as I can tell. However, I seem to recall numerous articles in the media essentially criticizing the VRX currency due to the fact that the GAAP numbers look like crap. As others have mentioned, I guess the media will embrace ACT over VRX if they make ostensible claims to not cut R&D as much as VRX. I haven't gone through the numbers for the ACT-AGN deal, but I believe that it leaves the pro forma entity like 5x levered. ACT says they are going to delever to 3.5x in 12 months. I don't know...there seems to be an inherent contradiction here. Regardless, I have also seen some comments in the thread that are somewhat favorable towards AGN management. I think it would be worth considering an "alternative history" to this particular scenario. Imagine Ackman and VRX never came to the table with the bid. What would AGN management be doing today? Would they be buying back stock? Would they be implementing the cuts that they described after the VRX bid? I don't think so. Link to comment Share on other sites More sharing options...
Liberty Posted November 19, 2014 Share Posted November 19, 2014 My comment was more towards the media coverage. I can understand Pyott et al. embracing ACT at the end. I mean, look at the ACT financial statements. Obviously, you aren't getting anywhere with GAAP accounting there. Zero mention of that from the media coverage of the ACT-AGN deal as far as I can tell. However, I seem to recall numerous articles in the media essentially criticizing the VRX currency due to the fact that the GAAP numbers look like crap. Good point on the media coverage. I think the media was mostly repeating what AGN, and their PR firms and bankers, were feeding them (and on the other side what Ackman was feeding them, but to a lesser extent because everybody loves an underdog and Ackman isn't it, and Ackman prefers to bypass the media and get the message out directly). The "let's protect R&D!" narrative was also a very easy sell to the media, making VRX look like the bad guy (are big miners who do less costly and uncertain exploration themselves than the average of their peers and instead buy juniors who have found something "bad guys"? or is it just a different, possibly superior model?) Link to comment Share on other sites More sharing options...
Liberty Posted November 20, 2014 Share Posted November 20, 2014 Piece in the journal with some backstory in the Ackman-Pearson partnership: http://online.wsj.com/articles/ackman-valeant-alliance-proved-unwieldy-1416440911 Not sure how well-informed the journalists can be about what's really going on, but we probably won't know more than this... Also: http://ir.valeant.com/investor-relations/news-releases/news-release-details/2014/Valeant-Pharmaceuticals-Announces-New-2-Billion-Securities-Repurchase-Program/default.aspx 2bn buyback approved, starting tomorrow. Link to comment Share on other sites More sharing options...
peter1234 Posted November 20, 2014 Share Posted November 20, 2014 Still, even in defeat, the 2 sides can look forward to a tidy profit. Valeant and Pershing Square Capital Management LP, Mr. Ackman’s firm, stand to make a combined $2.6 billion on paper from the Actavis deal price. The people say the men remained on good terms throughout. Not a bad payout for 'defeat'. Link to comment Share on other sites More sharing options...
Liberty Posted November 20, 2014 Share Posted November 20, 2014 Still, even in defeat, the 2 sides can look forward to a tidy profit. Valeant and Pershing Square Capital Management LP, Mr. Ackman’s firm, stand to make a combined $2.6 billion on paper from the Actavis deal price. The people say the men remained on good terms throughout. Not a bad payout for 'defeat'. Valeant gets 15% of the profit, so close to 400m. Link to comment Share on other sites More sharing options...
Liberty Posted November 21, 2014 Share Posted November 21, 2014 Looks like Ackman is sending Valeant (VRX) its share of the AGN profits right away. http://www.valuewalk.com/2014/11/ackman-sells-allergan-shares-transfer-344m-valeant-within-days/ Link to comment Share on other sites More sharing options...
Liberty Posted November 27, 2014 Share Posted November 27, 2014 Jeff Ubben of ValueAct just bought almost $30m of VRX at $142/share: http://www.sec.gov/Archives/edgar/data/885590/000141881214000081/xslF345X01/primary_doc.xml Link to comment Share on other sites More sharing options...
loganc Posted November 27, 2014 Share Posted November 27, 2014 Jeff Ubben of ValueAct just bought almost $30m of VRX at $142/share: http://www.sec.gov/Archives/edgar/data/885590/000141881214000081/xslF345X01/primary_doc.xml Hempton trolling you on Twitter on Thanksgiving. Classic! Where does this guy find LPs? Link to comment Share on other sites More sharing options...
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