Activist Shareholders Complicate Buyout Math

The efforts of an increasingly vocal group of activist shareholders, including Carl Icahn, Matrix Asset Advisors, Third Point, ValueAct, and Baker Brothers Advisors, to flush out the interest of strategic buyers has become compelling and increasingly commonplace.

It’s no secret: biotech stocks are often worth more – a lot more – to strategic buyers than to financial ones. Perhaps the clearest test of this hypothesis: since 2005, on average, private companies have been acquired for $79 million more—or 49% more—than the pre-money values of IPOs. (See Exhibit 1.) No wonder that virtually all IPOs today, notes Goldman Sachs investment banker Geoff Parker, are dual-track processes: they may not be publicly soliciting buyout offers, but their boards are all prepared for them.

But for companies not controlled by venture capitalists—whose only goal is to maximize returns as fast as they can—the gap between financial and strategic buyers has been harder to bridge. That’s why the efforts of an increasingly vocal group of activist shareholders—including Carl Icahn, Matrix Asset Advisors, Third Point, ValueAct, and Baker Brothers Advisors—to flush out the interest of strategic buyers has become so compelling and increasingly commonplace. Most recently Genzyme Corp.’s proposed takeover of its clofarabine (Clolar) partner Bioenvision Inc. for $345 million in cash has been called into question by 13.4% shareholder SCO Capital Partners, which argues that the offer discounts the value of Bioenvision’s pipeline.

While Genzyme offered a seemingly respectable 50% premium to the 20-day closing average of Bioenvision’s stock, the biotech had been hovering around its 52-week low. In a June 5th letter to Bioenvision’s board, SCO Capital chairman Steven Rouhandeh warned that "we remain extremely concerned about the valuation and timing of the transaction, and what appears to be a lack of a formal sale or auction process." Rouhandeh also called into question Perseus-Soros BioPharmaceutical Fund LP’s backing of the deal, suggesting that the fund "may have simply grown tired of its investment in Bioenvision and brokered a ‘quick sale’ to Genzyme, a corporate entity with which Perseus-Soros has had previous business dealings." As of press time, analysts—even those who feel the price undervalues Bioenvision—reckon the deal will proceed.

Genzyme has been here before, and relatively recently. The AnorMed Inc. hostile takeover situation last year was an early example of savvy shareholders rocking the boat: Julian Baker, a partner with brother Felix in Baker Brothers Advisors, used his 20% stake in AnorMed to throw out directors who were pushing a worldwide deal with Genzyme on the Canadian biotech’s most important product, the stem cell mobilizer Mozobil currently in Phase III clinical trials. Partnering Mozobil, he rightly figured, would reduce—at least in the near-term—the takeout value of AnorMed. No one would pay much for the company if Genzyme controlled its major asset—and even Genzyme would only buy it at a discount. (Similarly, US rights to Bioenvision’s Clolar leukemia drug are already held by Genzyme through its February 2004 acquisition of Ilex Oncology, Bioenvision’s original partner on the compound, perhaps dampening others’ enthusiasm to take part in a bidding war [See Deal] [See Deal].)

After the AnorMed boardroom shuffle was complete, things happened quickly. The Baker-controlled board pulled the term sheet; Genzyme countered with a hostile offer to buy the company outright at a 70% premium. The board invited in other bidders: Millennium Pharmaceuticals Inc. bid $12 – which Genzyme topped with a $580 million, $13.50 per share bid: roughly 270% over its valuation when Baker first pulled it out of the Genzyme alliance. (See "Genzyme Breaks a Biotech Taboo: The Hostile Bid for AnorMed," IN VIVO, November 2006 (Also see "Genzyme Breaks a Biotech Taboo: The Hostile Bid For AnorMED" - In Vivo, 1 Nov, 2006.).)

Matrix accomplished much the same thing—if on a larger scale—with MedImmune Inc. Teaming up with Carl Icahn, it forced the company, which was facing a long and expensive pipeline development program, to start an auction. AstraZeneca PLC won the bidding with an astounding $15.6 billion offer, or nearly 12 times MedImmune’s 2006 sales and a 53% premium over its price the day before it announced it would explore "strategic alternatives"[See Deal]. (See "Reviewing Five Years of Big Pharma’s Biotech Acquisitions," IN VIVO, May 2007 (Also see "Reviewing Five Years of Big Pharma's Biotech Acquisitions" - In Vivo, 1 May, 2007.).) Matrix accomplished this trick with a mere 1% stake in MedImmune: boards are a lot more willing to listen to shareholders than they used to be.

But the strategy isn’t foolproof—it requires a motivated buyer. Third Point’s Daniel Loeb has managed to throw management out of Ligand Pharmaceuticals Inc. and Nabi Biopharmaceuticals , for example, but still hasn’t managed to drive the kind of high-value takeovers seen with AnorMed and MedImmune. And it isn’t clear that his shrill attacks on PDL BioPharma Inc.’s chief executive Mark McDade are having the intended affects (one letter to the board of PDL colorfully castigates McDade for wasting shareholder money on boat slips and empire building). So far Loeb hasn’t attracted much support. PDL’s board has sided with McDade, though investors have smelled blood, sending PDL’s shares up by more than a third since the shouting began.

The investors who will win this arbitrage game are those who know which companies are good takeover candidates. And that generally means companies who are already relatively well managed. Julian Baker, for example, threw out the AnorMed board—but he kept most of the AnorMed management. In any case, whether or not Third Point’s Loeb drives change at PDL, or if SCO can wangle a better deal for Bioenvision, shareholder activism is unlikely to abate as long as the biopharma M&A market remains robust.

Roger Longman