Mallinckrodt to Buy Questcor: 5 Deals That Blew Up the Short-Sellers

NEW YORK (TheStreet) -- Mallinckrodt (MNK) is buying Questcor Pharmaceuticals (QCOR) for $5.6 billion in yet another big pharma deal aimed at lowering U.S. corporate tax rates. The cash-and-stock merger, however, may also have short-sellers of Questcor ducking for cover.

Herb Greenberg: Questcor a Smart Seller or Mallinckrodt a Dumb Buyer

TheDeal's Activist Watch List Cites Heavily Shorted Takeover Targets

Mallinckrodt Is Just One Of Dennis Kozlowski's Billion Dollar Babies

Questcor Pharmaceuticals has been a controversial stock for years after short-selling research firm Citron Research raised concerns about the efficacy of the company's Acthar gel, which is marketed for multiple sclerosis and other autoimmune and inflammatory disorders. Citron began publishing negative research reports on Questcor in 2012, and in February 2014 the firm continued to question whether Acthar would ultimately get the Food and Drug Administration's support.

In the past 12 months, short interest in Questcor's shares has generally hovered in the high single digits and low-to-mid teens, according to Bloomberg data. Monday's takeover announcement by Mallinckrodt, however, indicates that strategic buyers believe Questcor and Acthar will turn into a success.

Mallinckrodt will buy Questcor for $30 in cash and 0.897 a Mallinckrodt share for each Questcor common share. Based on the company's closing prices on April 4, the deal represents a price of approximately $27 per share and a premium of approximately 33% over Questcor's trailing 20-trading-day volume-weighted average price.

Were the deal to close, it wouldn't be the first time a strategic or private-equity buyer stepped in to buy a company that was the target of short-sellers.

Stryker Buys Mako Surgical

In September, Stryker (SYK) announced a $30 a share offer to acquire MAKO Surgical, the maker of robotic medical equipment. At the time of the deal announcement, MAKO was among the most shorted stocks on the Nasdaq with 10,313,353 of its 47 million shares sold short, or 22% of its float, as of mid-September.

Founded in 2004, MAKO is a pioneer in robotic assisted orthopedic surgery technologies, including its Robotic Arm Interactive Orthopedic System and flagship MAKOplasty Partial Knee Resurfacing procedure.

The company, however, struggled as a result of concerns over its robotic technologies and a string of accidents and lawsuits at competitor Intuitive Surgical (ISRG). Citron Research has been one of the most prominent critics of Intuitive Surgical, and that scrutiny, in addition to a string of earnings shortfalls, caused MAKO to perform poorly in the year prior to its buyout.

MAKO peaked at over $40 a share in the spring of 2012, but shares ended the year at just over $12 a share. Stryker's $30-a-share offer in September, however, was a painful deal for shorts to swallow. Stryker's buyout came at an 85% premium at the time.

Muddy Waters and Focus Media

Mallinckrodt's Questcor buy is also reminiscent of private-equity firm Carlyle Group's $3.8 billion takeover of Chinese advertising firm Focus Media.

In 2011, short-selling research firm Muddy Waters alleged that Focus Media had overstated its advertising screen sales and overpaid for acquisitions, causing shares in the company to fall nearly 40%, closing at $15.43.

Muddy Waters came to prominence after raising concern about the accounting standards and disclosures of Chinese companies that had become publicly traded in North America through reverse mergers. The firm's most notable call was an allegation of fraud against Sinoforest that proved canny when the company declared bankruptcy in 2012. Canadian authorities have since launched probes into Sinoforest and its management.

Focus Media didn't turn out the same way for Muddy Waters. Focus Media shares quickly recovered in the wake of Muddy Waters allegations and a strong response from the company.

In August 2012, Focus Media Chairman Jason Jiang and the private-equity firm teamed up on what was the biggest private equity-takeover of a publicly traded company in China, offering $27 a share, or $3.8 billion, for Focus Media. The deal closed in May 2013, ending a highly watched takeover effort.

Olam, Temasek and Muddy Waters

In March, commodities trader Olam, another prominent Muddy Waters target, announced a $4.2 billion deal to be acquired by Singaporean sovereign wealth fund Temasek, in a takeover that went counter to the firm's short recommendation.

Muddy Waters, in November 2012, recommended shorting Olam's shares and argued the company's business model was reminiscent of Enron and was "likely to fail." In particular, Muddy Waters said Olam was financing projects that were unlikely unlikely to generate the cash flow to cover their debts. The firm also questioned whether Olam had ample liquidity.

Olam CEO Sunny Vargese quickly responded to Muddy Waters' allegations. Shares in Singapore-based Olam quickly recovered. Temasek's $4.2 billion takeover offer of $2.23 SGD per share in cash came at a 12% premium. Were the March 13 offer to close, Olam's shares would have gained 14% since Muddy Waters made its allegations.

HP's Autonomy & Palm Buyer's Remorse

Hewlett-Packard  (HPQ) has been a particularly active company when it comes to acquiring battle ground stocks. HP's acquisition of Palm in 2010 and its 2011 deal for Autonomy both targeted heavily shorted tech sector specialists.

While HP may have smoked short-sellers in both deals, the company has suffered the most. HP bought Palm for $1.2 billion in 2010 and by 2013 it had discontinued Palm's operating system.

Autonomy, HP's third largest acquisition, faced an even worse outcome. Former CEO Leo Apotheker announced a deal to buy Autonomy for over $10 billion in August 2011, a huge takeover premium at the time, in a bid to transform the PC maker to a software and services specialist. Apotheker conceived a strategy to buy Autonomy and spin off HP's cash generating printing division.

Within a year's time, Apotheker was gone, HP had rededicated to PCs and printing, and concerns began to emerge about Autonomy.

In November 2011, HP wrote off most of its Autonomy transaction and accused the company of accounting fraud. Autonomy founder Mike Lynch has since rejected HP's allegations of fraud and hired PR specialists to help make his case.

For some short-sellers, Autonomy's woes were apparent when the company was independently listed in London. Legendary short-seller Jim Chanos of Kynikos Associates told TheStreet's Herb Greenberg that Autonomy was his firm's biggest European short in early 2011.

Chanos believed that the prospects of Autonomy's e-discovery might not be as great as the company imagined. The short-seller also questioned Autonomy's growth figures, its margins and the company's overall opacity on earnings.

After the Autonomy acquisition was announced, Chanos said at November 2012 investor conference he then shorted HP's shares.

What does the Future Hold?

If today's controversial stock is tomorrow's takeover target, then watch for any transactions for Herbalife (HLF) and Keurig Green Mountain (GMCR).

Herbalife, if you haven't heard, is Bill Ackman's billion dollar short bet, and also a large long investment of activist investor Carl Icahn. Icahn currently owns more than 16% of Herbalife stock and has the ability to buy 25% of the multi-level supplement seller's shares. Herbalife bulls have long-argued the company could enter a take private transaction.

After striking a deal with Coca Cola (KO) earlier in 2014, Keurig Green Mountain -- the company formerly known as Green Mountain Coffee Roasters -- could also become a takeover target. Kuerig Green Mountain has been dogged for years by short-seller David Einhorn of Greenlight Capital. Einhorn has questioned the prospects of Kuerig Green Mountain's k-cup business, and the firm's accounting.

In February, Coca-Cola took a 10% stake in Keurig Green Mountain, in a deal that also gave the company the ability to boost that stake to 16%. Both companies also entered into a deal to make Green Mountain the exclusive partner for the production and sale of Coca-Cola-branded single-serve, pod-based cold beverages.

TheDeal's Activist Watch List

See TheDeal's 'Activist Watch list' for other heavily shorted stocks that could become takeover targets.

-- Written by Antoine Gara in New York

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