Why Valeant's Hostile Takeover Bid of Allergan Is Bad for Shareholders

NEW YORK (TheStreet) – Allergan (AGN) , the maker of cosmetic injection Botox, is in high demand. That the company recently beat revenue estimates by 5% suggests consumers can't get enough of Allergan's beauty products.

That's why Bill Ackman, hedge fund manager of Pershing Square, working with one of Allergan's rivals, wants to speed up the pace of the continuing battle to buy the company. Now they may be one step closer.

Ackman, Allergan's biggest shareholder, knows Allergan's growth prospects and the effort with Valeant Pharmaceuticals (VRK)   to take over the company can have near-term and long-term effects.

There's nothing superficial about Allergan's stock. With shares around $167 and soaring close to 56% on the year to date, investors are happy. No wonder Allergan continues to resist Valeant's M&A overtures.

Revenue has soared 16% in the most recent quarter and every segment is growing by double digits. Even more impressive, helped by strong expenses management, Allergan posted a 25% jump in operating income, which beat Wall Street estimates by roughly 7%.

Valeant and Bill Ackman are in hot pursuit of Allergan for all of these reasons. The two have gone to court to force Allergan to schedule a vote for earlier than planned on their latest bid. At the same time, Allergan, by its own operational excellence, continues make a strong case for why it should be left alone.

Allergan officials were not available for comment, and emails sent to Valeant and Pershing Square were not immediately returned.

Ackman and Valeant won a lawsuit Thursday that forces a hearing to be held in October. Allergan had set a Dec. 18 date for its special meeting on the M&A discussions and electing new board members.

In a recent statement, Allergan said that Valeant and Pershing Square want to expedite the meeting to facilitate Valeant's "grossly inadequate offer."

In response, Laurie Little, spokesperson for Valeant said, "Allergan's rejection of Valeant's proposal is based on beliefs and assumption about our business that are not supported by the facts."

Still, it's tough to argue against Allergan's position, which is "leave us alone, we are doing just fine." From my vantage point it's hard to see what, if any, incremental value for Allergan this deal will create.

Assuming Valeant wins this bid, the company will resort to cutting costs to extract as much synergy and value creation it can muster.

Meanwhile, Allergan just unveiled its own cost-cutting program that will save the company almost $500 million, which now has the company on track to deliver $10 per share for 2016. That's almost $2 better than prior estimates, according to Yahoo! Finance, which makes Allergan meaningfully undervalued despite its year-to-date gains.

So what is there for Valeant and Pershing Square to "fix?"

Valeant and Pershing Square see an opportunity to capitalize on a company that's operating on all cylinders, and want to pay as little as possible to get it. But it's not because Allergan's "needs the help."

It will be several weeks before Wall Street knows Allergen's fate but for now management and its board are right to resist the bid and protect the interest of shareholders.

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

Follow @Richard_WSPB

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, expanding profit margins, solid stock price performance and growth in earnings per share. We feel these strengths outweigh the fact that the company shows weak operating cash flow." You can view the full analysis from the report here: AGN Ratings Report

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