Hasty hostility costs Valeant its Cephalon quarry

By Robert Cyran

Hasty hostility has cost Valeant Pharmaceuticals its quarry. The drugmaker hoped to snaffle rival Cephalon in weeks with a proxy fight it launched late in March. But Valeant made it clear it wouldn’t get in a bidding war. That left plenty of room for white knight Teva Pharmaceutical to swoop in for Cephalon with a higher, $6.8 billion offer.

Hostile deals are difficult to seal. Instead of quiet backroom conversations, everything is played out in public. Valeant’s effort to dismiss the managers of Cephalon was a recipe for rancor. There was also an element of opportunism about the $73 a share offer it took directly to Cephalon’s shareholders. Valeant said if it didn’t get enough support by mid-May, it would walk away. At best, the would-be acquirer indicated it would increase its offer only slightly if Cephalon opened its books.

The result was merely to flush the quarry into the open, where it has now been bagged by Teva. The white knight is stumping up $81.50 a share, a 12 percent premium to Valeant’s price, partly based on the belief that its target’s pipeline has value – something Valeant didn’t recognize. A softer approach by Valeant might have made Cephalon less reflexively hostile.

Alternatively, a higher initial bid might have scared off rivals. But Valeant missed that trick, too. Sure, it offered a 24 percent premium to Cephalon’s market price, but health companies often attract twice as much. And figures from its past mergers suggest Valeant low-balled the annual cost savings that the combination would have created. The fact that investors marked down Valeant’s stock by 7 percent when it said it was abandoning its bid implies value may have been left on the table.

Even though it misplayed its hand along the way, Valeant is right to fold now. Engaging in a bidding war, or overpaying, would have set a bad precedent for future transactions. The company thinks buying up rivals, cutting costs and selling their undeveloped drugs is a recipe for value creation. There are still plenty of targets, such as Forest Laboratories and Endo Pharmaceuticals, which fit the bill. Next time, expect Valeant to play its cards more patiently.

Published on May 2, 2011

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