Allergan Finds a Hole in Valeant & Ackman Partnership

NEW YORK (TheStreet) -- There were no tips on the golf course, no secret meetings on a deal, just a telephone call from Valeant Pharmaceuticals' (VRX) CEO to William Ackman of the hedge fund Pershing Square. The call was to seek a partnership between Valeant and Pershing Square to help build a large position in Allergan (AGN) stock, win board seats and pressure the company to agree to a deal with Valeant.

Insider trading? Maybe. Against the law? Maybe not. The right way to do business? No way.

This is the first known instance of this tactic. But given the extra scrutiny and lawsuit now being filed it may be the last.

In a lawsuit, Botox maker Allergan alleges insider trading by Ackman and rival Valeant. In the civil case filed in California, Allergan states that Pershing Square and Valeant "hatched" an "improper and illicit insider-trading scheme" that allowed Ackman to purchase shares in Allergan ahead of the planned $51 billion buyout.

Pershing Square's 9.7% stake in Allergan, purchased between February and April in the form of call options, and a small $76 million worth of stock, gained $1.2 billion in value the day the buyout plan was announced.

Pershing Square and Valeant have a unique partnership agreement that was set up to skirt insider trading rules. That is the subject of the lawsuit.

Valeant and Ackman appear to have gone wrong, according to Allergan, in the documents they had drawn up by a legion of lawyers, including a former head of the Securities and Exchange Commission. The suitor companies laid out procedures that would be followed should their deal not be accepted by Allergan. In doing so, they possibly broke an SEC rule regarding tender offers.

In the lawsuit, Allergan is arguing Ackman and Valeant violated the S.E.C. rule 10b-5 that makes it illegal to share information before a takeover bid when it is part of a tender offer in which the suitor goes directly to shareholders, bypassing the board. After Allergan rejected the bid, Valeant and Pershing Square began a tender offer on June 18.

"On April 22, we announced our offer for Allergan. We suspected at the time it would ultimately have to go directly to Allergan shareholders. We were correct." Valeant CEO Pearson stated in a conference call.

When it rains it pours for Bill Ackman. His billion dollar short bet on Herbalife stumbled a week ago when his Herbalife presentation sent shares higher, not lower. Now he's in the news because his Pershing Square fund is being sued for insider trading by Allergan.

Valeant and Pershing are fighting back and attempting to have the lawsuit thrown out.

"This is a shameless attempt by Allergan to delay the shareholders' fundamental right to call a special meeting," Ackman said in a statement. "Allergan's determination to waste money on a baseless lawsuit against its largest shareholder further demonstrates why this board of directors should be removed."

Without a shareholder meeting, Pershing Square and Valeant may not have the support they need to remove Allergan's "poison pill," inserted to prevent any hostile takeover.

As the old saying goes, if it quacks like a duck and it looks like a duck it probably is a duck. The Pershing/Valeant deal looks like insider trading. Under current laws it may not be, but that could quickly change.

If Allergan prevails in its suit, Ackman could be looking at yet another hit to his fund and his reputation.

At the time of publication, the author held no positions in any of the stocks mentioned, although positions may change at any time.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.


TheStreet Ratings team rates ALLERGAN INC as a Buy with a ratings score of A+. TheStreet Ratings Team has this to say about their recommendation:

"We rate ALLERGAN INC (AGN) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures, growth in earnings per share, compelling growth in net income and solid stock price performance. Although no company is perfect, currently we do not see any significant weaknesses which are likely to detract from the generally positive outlook."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth came in higher than the industry average of 5.4%. Since the same quarter one year prior, revenues rose by 16.7%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • The current debt-to-equity ratio, 0.32, is low and is below the industry average, implying that there has been successful management of debt levels. Along with this, the company maintains a quick ratio of 3.39, which clearly demonstrates the ability to cover short-term cash needs.
  • ALLERGAN INC has improved earnings per share by 17.1% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, ALLERGAN INC increased its bottom line by earning $4.20 versus $3.57 in the prior year. This year, the market expects an improvement in earnings ($5.79 versus $4.20).
  • The net income growth from the same quarter one year ago has exceeded that of the S&P 500 and greatly outperformed compared to the Pharmaceuticals industry average. The net income increased by 15.9% when compared to the same quarter one year prior, going from $359.90 million to $417.20 million.
  • Investors have apparently begun to recognize positive factors similar to those we have mentioned in this report, including earnings growth. This has helped drive up the company's shares by a sharp 82.02% over the past year, a rise that has exceeded that of the S&P 500 Index. Looking ahead, the stock's sharp rise over the last year has already helped drive it to a level which is relatively expensive compared to the rest of its industry. We feel, however, that other strengths this company displays justify these higher price levels.

More from Opinion

3 Warren Buffett Stock Picks That Could Be Perfect for Your Retirement Portfolio

3 Warren Buffett Stock Picks That Could Be Perfect for Your Retirement Portfolio

Wednesday Wrap-Up: GE and Facebook

Wednesday Wrap-Up: GE and Facebook

PayPal Strikes Again, Facebook, and AT&T -- 3 Tech Stories You Must Know

PayPal Strikes Again, Facebook, and AT&T -- 3 Tech Stories You Must Know

How to Invest Like Warren Buffett

How to Invest Like Warren Buffett

50 Stocks That Could Be Shredded If a U.S. Trade War With China Ignites

50 Stocks That Could Be Shredded If a U.S. Trade War With China Ignites