William Ackman speaks to the audience about Herbalife in New York, July 22, 2014.Eduardo Munoz/Reuters
Bill Ackman is set to pocket a huge score on Actavis PLC's monster $66-billion (U.S.) friendly agreement to acquire Allergan Inc., but the legacy of his takeover touchdown is about more than money.
To be sure, the scale of Mr. Ackman's financial gain on Allergan is blinding. The 9.7 per cent stake he acquired in Allergan earlier this year for an average cost of $129 a share will nearly double in value under Actavis's $219 a share bid. According to insiders, Mr. Ackman's New York hedge fund Pershing Square will earn a profit of more than $2.5-billion if the Actavis succeeds with its bid. Under terms of a unique partnership, Pershing will share about 15 per cent of its gains with Montreal's Valeant Pharmaceuticals International Inc., which partnered with the activist earlier this year on a hostile bid to acquire Allergan.
The scale of Mr. Ackman's win is sure to inspire copy cat activist plays. On one hand, Mr. Ackman has clearly strengthened the activist arsenal by successfully teaming up with Canada's Valeant to put Allergan, a California-based maker of such skin products as Botox, into play.
The unique Pershing-Valeant partnership was part takeover play and part proxy battle, designed to force Allergan to relax its takeover defences – some of the most formidable in North America. You could call it a hostile takeover, fought through a proxy battle.
In theory, Pershing sought to combine its 9.7 per cent stake with other sympathetic institutional investors to force Allergan's hand with a shareholder vote. It would be an understatement to say the play was ambitious. Valeant is a middle-tier player in the pharmaceutical space, and Allergan is protected by one of the most formidable takeover moats in corporate America. It is difficult, for example, for Allergan investors to requisition a shareholder vote without the backing of about a quarter of the company's shares and the company is further insulated by voting restrictions.
After seven months of legal skirmishes, it appears that Pershing and Valeant attracted enough shareholder support to push Allergan into arms of its white knight, Actavis. What is less clear is whether other activist-takeover combos will be as potent in the future.
The sticky legal issue is the circumstances under which Pershing acquired its 9.7 per cent stake in Allergan. The stake is known in takeover circles as a toehold, a minority position acquired by a potential suitor before a bid is launched. Toeholds are a standard takeover tactic. What is not so standard are the circumstances under which Pershing acquired its toehold. The purchase was made after it was aware of Valeant's takeover ambitions. Is this legal? Allergan subsequently sued, and although U.S. District Court judge David O. Carter allowed Mr. Ackman and Pershing to participate in a potential shareholder vote, they were also forced to disclose to investors that the court raised "serious questions" about whether they had violated securities laws.
Corporate lawyers and judges will be busy for months, possibly years, defining the boundaries of activist-led takeover plays. Until then, one thing is certain. Mr. Ackman's winnings on Allergan is plenty of inspiration for other activists to keep testing these boundaries.