The poor performance of Bristol Myers shares and its agreement to buy troubled Celgene for $74 billion may explain Starboard’s interest.
NEW YORK: Shareholder activists are turning guinea pigs in drug merger and acquisition(M&A) trials. Starboard Value is targeting $84 billion Bristol-Myers’ board. Appaloosa founder David Tepper, meanwhile, is pushing $46 billion Allergan to sell itself if it can’t fix its problems. They’re both using standard tactics for shaking up companies. But Big Pharma’s size and complexity provide some immunity to such attacks.
The poor performance of Bristol-Myers shares and its agreement to buy troubled Celgene for $74 billion may explain Starboard’s interest. But Jeffrey Smith’s hedge fund has yet to offer either a diagnosis or a cure. According to Bristol-Myers, the activist intends to nominate five directors. The annual meeting, though, comes after the shareholder vote on the Celgene acquisition. Convening an earlier meeting is a long shot, requiring the support of 25 per cent of shareholders.
That leaves fixing or selling the company. The board isn’t a problem – five of the 11 directors have been appointed since 2016, and members are well salted with pharmaceutical expertise. There’s no obvious buyer for the firm, either, and it’s not clear why they would need Starboard. In addition, the activist’s stake in the company is a minuscule $51 million, according to Bristol-Myers.
Tepper, on the other hand, is annoyed at Allergan’s questionable deals, chunky writedowns and poor performance. He pins the blame on poor management and the board’s unwillingness to hold Chief Executive Brent Saunders responsible. Allergan has reluctantly embraced a good idea of separating the chairman and CEO roles when the next boss is appointed after 40 per cent of its shareholders voted for the proposal at last year’s annual meeting. Appaloosa wants them to do it immediately. Persuading its fellow owners to a proxy fight over the issue so soon after extracting a concession from Allergan will be a tall order.
Campaigns against big drug companies aren’t impossible. Carl Icahn helped push ImClone into Eli Lilly’s arms a decade ago for $6.5 billion and Genzyme into Sanofi’s a few years later for $20 billion. But drug development is a long and complex process, and generalist investors can have trouble valuing R&D and intellectual property. Elliott Management wanted Actelion to sell itself in 2011 – the Swiss firm fended off that assault and sold itself in 2017 for over four times as much.
The medicine Starboard and Appaloosa are offering probably won’t cure any ills.
-Bristol-Myers Squibb said in a filing on Feb. 20 that Starboard Value intends to nominate five directors to the drugmaker’s board. According to the filing, the activist has told Bristol-Myers that it holds 1 million shares. The value of that stake would be about $51 million based on the stock’s closing price on Feb. 20. Bristol-Myers has a market capitalization of $84 billion.
– Starboard has asked a proxy solicitor to probe the level of support among Bristol-Myers Squibb shareholders for its $74 billion deal to buy Celgene, according to Reuters. Bristol-Myers shareholders will vote on the Celgene deal in April.
– Separately, shareholder Appaloosa sent a letter to Allergan’s board of directors on Feb. 19 calling for the company to split the roles of chairman and chief executive. Appaloosa said the board has a fiduciary obligation to consider a sale if it is not willing to hold management accountable. The investor cited $13.4 billion of balance-sheet writedowns over the past four years, “embarrassing legal initiatives” and a “failed acquisition strategy” among other reasons for demanding more oversight.
The speciality pharma company plans to appoint different people to the two posts when it next changes CEOs. It rejected the call for a quicker split, arguing it would be disruptive for the company.