What the Actavis Buyout of Forest Laboratories Means for You

Actavis lays big money on the table to acquire Forest Labs -- is this a prudent move or a big reach for Actavis?

Feb 18, 2014 at 6:30PM

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Forest Laboratories (NYSE:FRX), a global producer of branded pharmaceutical products, rallied as much as 37% after a deal was reached by Actavis (NYSE:AGN) to acquire the company for roughly $25 billion in a cash and stock deal.

So what: Under the terms of the agreement, Actavis will pay Forest Labs' shareholders $26.04 in cash per share and 0.3306 shares of Actavis common stock to acquire Forest Labs. Based on midday trading, that would value Forest Labs at roughly $94 per share, although volatility would be expected to continue in Forest shares with a good chunk of its buyout price tied to the valuation of Actavis. Actavis notes that it anticipates the deal will be immediately accretive to earnings, with double-digit accretion expected in 2015 and 2016. In addition to bringing Forest Labs' portfolio into the fold, Actavis foresees cost synergies of approximately $1 billion annually and expects free cash flow generation will top $4 billion. The deal is expected to close by mid-2014.

Now what: I am officially scratching my head here, and I believe shareholders may want to consider doing the same. Forest Labs has definitely had a number of key wins over the past year and change with antidepressant Fetzima being approved by the Food and Drug Administration, as well as irritable bowel therapy Linzess, which was co-developed with Ironwood Pharmaceuticals. However, Forest is facing the patent expiration of Alzheimer's disease drug Namenda in 2015. As of last quarter, Namenda accounted for $401.5 million of Forest's $846.8 million in total sales. In other words, Actavis just purchased a company that's set to lose half its current revenue stream next year for $25 billion!

As I've mentioned, there are positives here in that Forest is profitable and will deliver positive cash flow for Actavis, as well as long-term cost savings. Potential remains high as well for Daliresp, Tudorza, and Bystolic, which are a part of Forest's respiratory line of products. But, in the end, Actavis may have paid what I suspect could be more than eight times forward sales for a company on the edge of the patent cliff. There's plenty of opportunity for this deal to work in Actavis' favor over the long term, but I see plenty of inherent risks built into this hefty price tag.

Forest Labs may be skyrocketing today, but its gains may wind up as just peanuts next to this top stock in 2014
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Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

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4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

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KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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