Following our earlier article, we analyse the latest Abbvie-Shire news that an announcement is expected of a £31bn bid, and what has happened since our recent assessment of this US takeover bid for one of the UK’s most valued growth companies.
Comparison with the Pfizer/Astra Zeneca approach
AbbVie have been a little less aggressive than Pfizer, though they have been dealing with an arguably more pragmatic board at Shire. The Shire board was seen to be reluctant to open its books to AbbVie at the initial bid price, £46.26, as they would then have had to be prepared to open them to other potential bidders.
However, in his enthusiasm the AbbVie CEO overstepped the regulatory mark when he was seen as attempting to get the Shire shareholders to pressure the Shire directors to resume talks. After increasing his offer from £46.26 per share to £51.15 per share, he was quoted as saying that the offer had broad shareholder support.
This fell foul of the rules of the UK Takeover Panel which requires that, in this situation, such a statement must be supported by written confirmation form the shareholders concerned. This resulted in a reprimand from the Panel.
The takeover wave driven by tax inversion
On 14 July, another tax inversion takeover was announced when Mylan, a developer of generics and specialist pharmaceuticals, announced that it was buying Abbott Laboratories’ branded speciality and generics business in developed markets for $5.3bn. The purchase would involve an inversion deal in which the combined company would be organised in the Netherlands to reduce its tax and the HQ would remain near Pittsburg in Pennsylvania in the US.
In an input which might impact on the bid for Shire, another large US pharmaceutical company, Allergen, makers of Botox, faced with a takeover bid by another US company, Valeant Pharmaceuticals, with an activist investor on board, is thought to be considering using its cash pile to bid for Shire, thereby putting itself out of Valeant’s reach.
A Shire investor was quoted as saying that Allergen would make a better strategic fit with Shire as it is growing faster. Interestingly, the Allergen defence criticises Valeant as cutting back on its Research and Development – echoes here of the AstraZeneca defence against Pfizer. The increased offer from AbbVie may put Shire beyond Allergen’s reach, though.
Political and governance issues
Although the bid for Shire has aroused little political interest so far, the intervention of the Takeover Panel is, perhaps, a straw in the wind. The Takeover Code was tightened by Vince Cable, the Business Secretary, after the prolonged Kraft takeover of Cadburys. It was widely felt that Kraft had reneged on their commitment to keep a particular factory open and preserve the related jobs.
In this tightening, restraints were imposed on an acquirer’s ability to walk away from pre-acquisition commitments and a 28 day rule to “put up or shut up” was introduced to put an end to prolonged takeover battles which could destabilise shareholdings and weaken the target company. It has been suggested that the US bankers advising the US acquirers in recent takeovers are ignoring the spirit of the rules of the Takeover Panel.
This is already having a political impact, and Business Secretary, Vince Cable, is now, apparently, considering creating extra powers for the Takeover Panel involving what has been described as a legislative “smart missile”. This would be used to block deals where the bidder was not prepared to make suitable promises about British jobs and investments.
How would we approach the Board’s decision?
Considering the current position against our Five Golden Rules:
Not much change here, except that the US tolerance of the use of tax inversion as an ethically acceptable device is surely getting more and more strained; this must represent a serious execution risk (as the Shire board apparently also fears)
In our last analysis, we concluded that the strategic case had not been made that the goal of the combined businesses represented a superior result for Shire compared with its existing goal. Nothing appears to have changed here. Arguably, the goal of the combined operation is a superior result for AbbVie, but that isn’t a reason for Shire to accept it.
Similarly, if the goal is not a clearly superior one, there cannot logically be a valid strategy. And if such a strategy has been thought out, there has been no observable public exposure to allay these doubts. Indeed, financial comment has raised issues about AbbVie paying so much that the combined debt of the merged company would threaten AbbVie’s currently prized investment rating.
There has been nothing of any consequence in the past few weeks to address the issues raised in Shire’s defence about the unsuitability of AbbVie’s sales and marketing capability to boost Shire’s current sales performance. Nor has there been any indication of where any cost savings would come from.
No change here
So there has been no change from a good corporate governance point of view to cause us to change our view from rejecting the deal to supporting the takeover. But what has apparently changed is that an additional incentive has been offered to one of the key stakeholder groups, the shareholders, to vote in favour. A commentator was quoted as describing this as a “fair price and good value for both sets of shareholders”
But what do the customers think and do the employees care who owns their employer?
General lessons for corporate governance
Perhaps naturally, the discussion in the financial papers focuses on the price the Shire board can extract from a bidder and about Shire shareholders not pushing too hard in case the deal does not happen. But what about the strategic considerations? Financial outcomes should follow strategic considerations by the directors who are charged with securing the company’s future success. Surely they should come second not first.
It raises important questions about the pressure selling shareholders can exert on the board and whether the directors should regard their duty as being primarily to secure the best future for the company or to maximise the selling price for the shareholders. The Companies Act would appear to favour the former.