Why Allergan Inc. Shares Skyrocketed

Allergan shares soared after receiving an unsolicited takeover bid from a rival. See how much of a premium Allergan shareholders are being offered and what they should do in response to this offer.

Apr 22, 2014 at 3:00PM

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 Allergan (NYSE:AGN), a global integrated-health-care company comprised of branded pharmaceuticals and medical devices, jumped as much as 17% after confirming it had received an unsolicited takeover offer from Valeant Pharmaceuticals (NYSE:VRX).

So what: According to Allergan's press release, it has received a takeover offer from Valeant that would pay $48.30 in cash and 0.83 shares of Valeant common stock in exchange for each share of Allergan. Based on the current price of these two stocks as of this writing, this would make Valeant the smaller company purchasing the larger ($44 billion market cap versus $48 billion for Allergan), and place a value of roughly $159 per share on Allergan. As per the press release, Allergan's board is going to carefully review the offer and it advises existing shareholders to take no action at this time.

Now what: I don't say this often, but Allergan shareholders should be thanking their lucky stars that Valeant is willing to pay such a hefty premium for a company that's been mildly disappointing from a growth perspective for the past couple of years. Although its dry-eye treatment Restasis is well-protected by patents, its purchase of MAP Pharmaceuticals to acquire inhaled migraine medication Levadex hasn't worked out, with the company receiving two manufacturing-based CRLs. Even more disappointing, its highly touted experimental vision-loss therapy DARPin failed to excite in midstage studies. This isn't to say other aspects of Allergan aren't growing, but a high single-digit-growth rate for a company valued at nearly 30 times forward earnings doesn't cut the mustard with this value investor. If I were an existing Allergan shareholder I would seriously consider cutting anchor and running with my profit here as the possibility of this offer falling through or being rejected is just too great.

Allergan shares may be skyrocketing higher, but it'll likely be no match for 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.

The Motley Fool owns shares of, and recommends Valeant Pharmaceuticals. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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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