Irreconcilable differences? Allergan investors wary of suitor Valeant's cost-slashing style

Valeant CEO J. Michael Pearson

Last week, Valeant CEO J. Michael Pearson seemed confident he could woo Allergan ($AGN) shareholders with his $46 billion bid--even after the California-based company's board swallowed a poison pill. But now, some of Allergan's largest shareholders are begging to differ. And that could threaten Pearson's quest to bag his latest target.

As The Wall Street Journal reports, Dan Davidowitz, chief investment officer of Polen Capital Management--a top-20 Allergan shareholder with about 0.9%--isn't fond of the deal Valeant and partner Bill Ackman put forth last week. As Davidowitz told the paper, Allergan could yield the same share price on its own, with a couple more years of earnings growth. "I don't think this is that attractive of an offer," he said.

And he may not be alone. As BMO Capital Markets David Maris told the WSJ, many of the company's other top shareholders have revealed their own reservations. For one thing, they're hesitant to take up Valeant ($VRX) shares as part of the cash-and-stock offer.

"There's a concern the currency--Valeant stock--is not worth dollar for dollar what they're getting. They'd rather have cash," he said.

A difference in modus operandi may be fueling their distrust, the Journal notes. Pearson has repeatedly shunned the R&D approach to building up business, terming it both risky and expendable. Instead, he has bolstered his company through a series of targeted deals in high-growth areas. Allergan, on the other hand, spends 17% of revenue on research, dwarfing the Canadian company's 3%.

That kind of spending would fall by the wayside in a combined company. Portrayal of Allergan as a "fat" company--the kind Pearson likes to buy, rife with opportunities for cost-cutting--is misleading, Sterne Agee analyst Shibani Malhotra wrote in a note to investors. As Pearson claims, a merger would generate "significant savings" and drive "immense shareholder value." But a high portion of those would come from R&D cuts, she said.

But while Malhotra expects Allergan to do everything it can to ward off Valeant, it won't do so at a cost to shareholders. "We expect the company will take time to consider bids from other potential buyers and potential mergers," she wrote. "… However, we believe that if these options do not make financial sense, management will likely turn its focus to negotiating the best possible deal terms with Valeant."

- see the WSJ story (sub. req.)

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