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Unusual alliances form in the Battle for Botox

The hostile battle for Allergan Inc. is making for some intriguing bedfellows.

First, we have the unusual alliance of activist New York investor William Ackman and Canadian-based Valeant Pharmaceuticals International Inc. Acquisitive, debt-loving Valeant is the sort of company that a hedge fund operator who focuses on wringing more value out of underperforming firms ought to be more interested in shorting than supporting in by far the most expensive foray in its history.

Then we learned that John Paulson, another heavy hitter in the New York hedge fund world, is joining the fray. His Paulson & Co., which already held more than a million shares of Valeant, has snapped up about six million shares of Allergan – about $1-billion (U.S.) worth. And he intends to vote all of them in support of the $53-billion-and-rising takeover bid for the Botox maker.

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No wonder Valeant CEO Michael Pearson is so confident that he is closing in on enough support from investors to call a special meeting to oust a majority of Allergan's recalcitrant board. He only needs votes accounting for 25 per cent of Allergan stock. And at least 20 per cent is already in the hands of hedge funds, arbitrage types and other market players more interested in quick scores than the costly development of blockbuster drugs.

Now Credit Suisse Group has emerged on the Valeant hit team as an adviser to Mr. Ackman's Pershing Square Capital Management LP, an uncommon move for a Wall Street investment bank, particularly one that specializes in designing defences against activists.

Activists (really the modern take on the old corporate raiders, clad in more investor-friendly clothes) come and go; but corporate clients provide a steady stream of financings, M&A deals, divestitures and other lucrative business over the long haul. And that includes advising on strategies to thwart unsolicited takeovers. So Goldman Sachs Group and other major banks tend to steer clear of involvements that could annoy their best customers.

Goldman, in fact, has lined up a gig on Allergan's defence team. Morgan Stanley ended up in Valeant's camp, but apparently only after it was rebuffed by Allergan.

The Wall Street Journal reports that Credit Suisse had internal discussions before accepting the Pershing business on the grounds that this is nothing more than a rich M&A assignment, possibly the biggest of the year.

Which says more about the state of post-crisis investment banking than anything else, as banks scramble to cope with tougher regulations and the loss of some key lines of business. In Credit Suisse's case, after a rough period that included a humiliating guilty plea and a hefty penalty of $2.6-billion for aiding American clients in their age-old battle to hide income from the Internal Revenue Service, the bank can certainly use a few more money-spinning deals.

Besides, Allergan's argument that Valeant's offer isn't the best interests of its shareholders because Valeant has scant interest in costly but essential research and development doesn't play well on Wall Street, with its continuing short-term focus on stronger cash flow, tighter cost controls and higher quarterly returns.

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Fortunately, the embattled target has other weapons that Wall Street does understand. Allergan is weighing a debt issue to buy back stock, boosting share earnings, and intends to deliver more aggressive cost cutting when it releases second-quarter results later this month.

If they go too far down that road, though, Allergan's entrenched board and management will impede the company's ambitious R&D spending and leave investors wondering what's so different about their defensive strategy and the offensive mounted by Mr. Pearson and Mr. Ackman.

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About the Author
Senior Economics Writer and Global Markets Columnist

Brian Milner is a senior economics writer and global markets columnist. In a long career at The Globe and Mail, he has covered diverse business beats, including international trade, the automotive industry, media, debt markets, banking and the business side of sports. More

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