Corporate Governance Prison – The Mylan – Perrigo Saga

The Mylan – Perrigo saga continues.  Friday marks the expiration of Mylan NV’s $26 billion dollar tender offer for Perrigo.   The saga began on April 8 when Mylan announced its bid which Perrigo’s board rejected.  Since that time, Mylan has raised its bid twice and has now announced the tender offer.   This is a fascinating tale combining mergers, inversions, hostile takeovers, takeover defenses, differing takeover laws and differing forms of corporate governance.   

Simply put, Perrigo is shareholder friendly while Mylan is stakeholder friendly.  To be fair, Perrigo didn’t have much choice but be shareholder friendly.  Irish law limits anti-takeover defenses so the company doesn’t have the options available to Mylan, now headquartered in the Netherlands.  

The stakeholder viewpoint allows Mylan to ignore what is in their shareholders best interest - putting those shareholders in what Perrigo has called a “corporate governance prison’.  Indeed, when Mylan itself was a target of Teva Pharmaceuticals, it used the stakeholder argument in its defense.  Now,  in a hostile deal, Mylan is bidding  stock and cash deal offering 2.3 of its own shares plus $75 in cash for each Perrigo share.  

In response to the ‘governance prison’ charge, Mylan has promised governance reforms if the deal goes through.  Don’t count on it.   If I were tendering, I be exchanging those Mylan shares for cash immediately, putting the funds into hands I know are shareholder friendly – my own.

For more on this saga see our most recent post which has links to some of the others.  Part of that post is reproduced below.

All the best,

Ralph  

September 17, 2015

Mylan, Perrigo and the Power of the Board

We've written before about Mylan and takeovers (e.g., Shareholder Centric or Stakeholder Centric and Offense and Defense in the Drug Industry).  This weeks Wall Street Journal contains an excellent article by Ron Barusch updating the Mylan story.  It presents a very interesting contrast between the takeover laws of Ireland, the Netherlands (where we teach the Acquisition Finance Course) and the US.  The facts below are taken from the article.

Mylan is attempting to take over Perrigo in a hostile deal.  Under Irish law, the directors of Perrigo can express their feelings about the deal, but must let shareholders decide on its merits.  If the deal fails, Mylan would have to wait a year before attempting another deal.  But the key is that shareholders - the owners of the firm, decide.

Contrast that with the situation of Mylan itself.  Mylan ..... the rest of that post can be found here.

Mylan, Perrigo and the Power of the Board

We've written before about Mylan and takeovers (e.g., Shareholder Centric or Stakeholder Centric and Offense and Defense in the Drug Industry).  This weeks Wall Street Journal contains an excellent article by Ron Barusch updating the Mylan story.  It presents a very interesting contrast between the takeover laws of Ireland, the Netherlands (where we teach the Acquisition Finance Course) and the US.  The facts below are taken from the article.

Mylan is attempting to take over Perrigo in a hostile deal.  Under Irish law, the directors of Perrigo can express their feelings about the deal, but must let shareholders decide on its merits.  If the deal fails, Mylan would have to wait a year before attempting another deal.  But the key is that shareholders - the owners of the firm, decide.

Contrast that with the situation of Mylan itself.  Mylan was a takeover target earlier this year when Teva Pharmaceuticals made a bid for the firm.  Mylan blocked the attempt by forming a "stichting", an independent foundation that is required to consider the interests of all stakeholders before approving a deal.  Giving the stichting voting control effectively blocks hostile takeovers.  Shareholders, the true owners of the company, lose the right to tender their shares for a premium.

Here is where it gets really interesting.  Shareholders can remove directors - but only with two-thirds of the voting shares and even then replacements are named by the board!  If the entire board is removed, "...the former chairman - that's right, the one who was just unseated- gets the powers of the board."

The article also discusses the shift in the US towards a more shareholder friendly governance structure with the elimination of poison pills and staggered boards and concludes by noting that Mylan escaped such moves when it became incorporated in the Netherlands earlier in a tax inversion.

Interesting reading and a warning to shareholders - the residual claimants and owners of the firm.

All the best,

Ralph

Shareholder Centric vs. Stakeholder Centric - Mylan and Teva

So let me ask you a question?  As a person or institution about to invest in common stock, what do you expect of the board and management?  I'll give you my own answer: I expect them to maximize the value of my shares.  If I didn't have that expectation, I'd never invest.

My response reveals a shareholder centric attitude - that management works first and foremost for shareholders.  While such a view is overwhelmingly favored by independent experts in  corporate governance, it is by no means without some legal, management and even some academic dissent.  The alternative view is stakeholder centric - that management must consider the well being of all of its stakeholders when making decisions.  Stakeholders other than shareholders include employees, bondholders, customers, and even the community in which a firm operates.

Stakeholder centric requirements in the United States vary with State Law and Corporate Charters.  Different countries around the world take different viewpoints with some (Ireland) being more shareholder friendly and others (The Netherlands) being more stakeholder centric.

This was borne out with Mylan's recent rejection of a $40 billion takeover by Teva.  (For interesting details, see Mylan). Mylan, formerly a Pennsylvania corporation became dutch based in February as part of an inversion - where companies merge with other companies to change the location of their headquarters.  Typically this is done for more favorable tax treatments but it also has other repercussions for shareholders - in this case enabling management to espouse a stakeholder approach to the takeover and find support under Dutch law.  What are the repercussions of a stakeholder centric view?  I'll mention three:

First, companies that could be run more efficiently under new management are protected under existing management.  It can be cost advantageous - and beneficial to society as a whole to have the company acquired.  In some cases it is beneficial to society as a whole to lay off employees and focus the company in more efficient ways.  Companies protecting employees may resist such change.

To be sure, communities can be harmed when companies close plants, lay off employees and perhaps move their location.  But community or state or country protectionism is harmful in the long run.  Subsidizing inefficient operations may prolong the inevitable, but it avoids the obvious - uncompetitive companies will ultimately die and shareholders and ultimately all stakeholders will suffer.  Protectionism and cross-subsidization will ultimately fail.  The employees,  companies and communities that thrive are those that embrace change and continually adapt - keeping themselves competitive in a global marketplace.

Second, situations that can benefit shareholders - the residual claimants in a company can be rejected.  Not only is this unfair to the owners of a company, it is again ultimately destructive.  Few investors would invest in a company that doesn't look out for their own best interests.

To be clear, stakeholders are important and they deserve every consideration by management.  Even under a shareholder centric view, the best companies are conscious of the needs and obligations of their stakeholders and fulfill these claims in consideration of the competitive marketplace.  Usually the claims of stakeholders are also defended by other means including contracts, union, and laws.  Shareholders are not provided the same contractual certainties that stakeholders enjoy.  They are the residual claimant of a firm's profits.  They are entitled to everything that is left after all other expenses and claims have been paid - if there is anything left.  Shareholders are not guaranteed a profit, but have the benefit of knowing management and the board are looking out for their best interests.

Third, boards that take a stakeholder centric approach are answering to more than one master - not an optimal situation.  It is never clear whose interests should be pursued or which direction to follow.  The typical result is stagnation.

To be sure, laws that permit boards to reject takeovers based on stakeholder theory can also insulate management from needed change.

Thus, Mylan's shareholders have lost the opportunity to sell their shares at a substantial premium.  Share prices fell 14%.

All the best,

Ralph

Offense and Defense in the Drug Industry: Teva and Mylan

A frequent topic in these posts is the fact that certain catalysts set an industry into play with regard to mergers and acquisitions.  It could be regulation, competition, the economy, changes in consumer tastes or something else.  (See Catalysts for Merger).  Our own research has shown that when a firm is an initial target or an initial bidder in an industry, following at least a 12 month minimum dormant period in the industry, the prices of rivals adjust in anticipation.  Moreover, the price adjustments are correlated with the probability of being a subsequent target or  bidder.

The industry consolidation in the drug industry has been going on for some time, and we certainly haven't seen a long dormant period in a while.  What is happening now is that rivals are positioning themselves in anticipation of future industry changes.  Hence, Teva launches a bid for Mylan industries in an attempt to break up Mylan's bid for Perrigo.  This will be a fun one to follow as it illustrates both offensive and defensive techniques of merger strategy.   In this case, the catalyst seems to be slowing growth in the industry and the decision to grow through acquisition to achieve a more dominant role.

(See Joe's related posts on this industry: Build or Buy, Chance Favors the Prepared Mind, and The Hammer and Nail).

All the best,

Ralph