The ongoing attempt by Allergan ($AGN) to thwart a Valeant ($VRX) takeover by bulking up with an acquisition of its own has officially turned nasty. On Tuesday, activist investor William Ackman of Pershing Square Capital Management sent a letter to Allergan threatening to sue the company if it goes ahead with its plan to buy Salix Pharmaceuticals ($SLXP)--a deal that reportedly could exceed $10 billion.
To recap, Allergan rejected a $53 billion offer from Valeant back in June and has since been on the hunt for an acquisition that would make Allergan too big to swallow. Actavis ($ACT) reportedly made a friendly bid for Allergan last month, which the company turned down, citing the impending Salix deal. Ackman, meanwhile, has been watching the whole drama play out and is clearly displeased about Allergan's ongoing attempts to fend off Valeant's pursuit.
"By undertaking an acquisition without a shareholder vote, with the purpose and desired effect of frustrating a Valeant transaction, you are breaching your commitment that shareholders would have a vote on the value proposition offered by Valeant," Ackman wrote in the letter. "We do not believe you can lawfully undertake such a transaction, particularly given your failure to engage with Valeant."
Allergan shot back, saying in a statement that it would not comment on rumors but that the "Allergan Board continues to conclude that Valeant's bid for Allergan is grossly inadequate and substantially undervalues Allergan. The Allergan Board is well aware of its fiduciary obligations and, in that context, is focused on enhancing value for all stockholders, unlike Ackman who is financially incentivized to deliver Allergan to Valeant at the lowest possible price."
Allergan CEO David Pyott opposes a Valeant marriage not just because he believes it undervalues his company, but also because Valeant CEO J. Michael Pearson is famous for ruthless cost-cutting and could go after Allergan's high R&D overhead. Actavis, by contrast, has promised to leave R&D intact. Allergan has agreed to hold a special shareholder meeting regarding the Valeant bid in December.
As for Salix, some analysts say that deal wouldn't be such a bad idea for Allergan. Analysts at Leerink estimated Tuesday that Salix would boost Allergan's earnings immediately, according to the Wall Street Journal.
Allergan may be getting a helping hand in this whole mess from the Obama administration, albeit indirectly. On Monday, U.S. Treasury Secretary Jack Lew announced new rules designed to thwart "tax inversions," or mergers that allow U.S. companies to move overseas to lower their corporate tax bills. Those rules could prompt Salix to abandon its plan to buy a division of Italy's Cosmo Pharmaceuticals--a deal that was already unpopular among Salix shareholders. A merger with Allergan would likely put an end to the Salix/Cosmo deal.