After Bristol-Myers Squibb and activist investor Starboard Value released dueling presentations on the planned $74 billion merger with Celgene earlier this week, Wall Street analysts started speculating about what might actually cause the deal to go south.
Credit Suisse analyst Vamil Divan raised one possibility: proxy advisory firms. They usually issue recommendations to shareholders about two weeks before a scheduled vote on a deal, which in the case of BMS and Celgene takes place April 12. So those recommendations should be mailed out within a week.
The key to the deal closing “will be the recommendation from the proxy advisory firms,” Divan wrote in a note to investors.
Prior to this week’s escalation of the war between Starboard and BMS, analysts, by and large, were predicting investors would vote thumbs-up on the Celgene deal in April. That’s because no matter how they crunched the numbers, they couldn’t come up with a scenario in which dissenters would be able to obtain enough votes to scuttle the deal.
But there has always been one risk lurking in the background: undecided voters. Those shareholders could, in fact, be swayed by arguments from Starboard, the major institutional shareholder Wellington Management—which also opposes the deal—or other naysayers. Hence shareholders may place some weight on recommendations from the proxy advisers that issue their own expert opinions.
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Jefferies analyst Michael Yee is betting that proxy adviser Institutional Shareholder Services (ISS) will advise institutional shareholders to approve the merger. After studying the 197-page presentation Starboard released on Tuesday, Yee declared that contained “no smoking gun” that would threaten the deal.
“ISS should recommend the deal,” Yee wrote in a note to investors. He predicted the spread between the opposition and those who are in favor of the deal “will likely narrow.”
Starboard argued in its recent presentation that the Celgene merger was negotiated in too hasty a manner and with the “wrong intentions, as a defensive measure designed to protect Bristol-Myers from becoming an acquisition target itself.”
The firm has been griping that BMS is buying into a company with a huge patent cliff, due to Revlimid, its multiple myeloma blockbuster. The eventual patent expiration on that product will require Celgene to replace more than 60% of its revenues over the next seven years, Starboard believes.
But after Starboard made that contention, Celgene scored a victory in its ongoing effort to shield Revlimid from generic competition, when the U.S. Patent and Trademark Office’s Patent Trial and Appeal Board declined to take up an inter partes review of a key Revlimid patent.
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Yee said in his recent note that the Celgene patent cliff is “already understood” and had already been priced into the deal. As for Starboard’s other complaint—which is that Celgene’s pipeline is risky and will require significant investment—“this is no different as a standalone,” Yee said, nor would it be any less perilous than BMS pursuing a string of small deals instead, “which itself is risky and everyone in the industry is trying to do, too.”
Credit Suisse’s Divan also sees some holes in Starboard’s arguments against the deal. Starboard seems to be saying that BMS is worth more as a standalone company, but that idea lacks some merit, “given Starboard did not take a material stake in Bristol until after the Celgene deal was announced,” he said in his recent note.
That being said, the power of proxy advisory firms like ISS certainly can’t be discounted when it comes to swaying shareholder opinion. Last year, ISS urged AstraZeneca shareholders to vote against the company’s planned bonus for CEO Pascal Soriot. That was enough to convince 35% of shareholders to vote against it or abstain—a significant revolt, though not enough to deny Soriot the bonus.