It doesn't look as if Bristol-Myers Squibb (NYSE:BMY) sought approval from its largest shareholders before offering Celgene (NASDAQ:CELG) a whopping $90 billion earlier this year.

Starboard Value owns a sliver of Bristol-Myers Squibb's outstanding shares, and the fund has zero enthusiasm for the deal. In addition to accusing Bristol of making a bad deal to prevent a larger takeover of itself, Starboard sent out 197 PowerPoint slides that make its case in exquisite detail.

Bristol quickly countered with 107 encouraging slides of its own that reiterate its reasons for buying Celgene. Can a shareholder revolt halt Bristol's acquisition plans?

Check out the latest earnings call transcripts for Bristol-Myers Squibb and Celgene.

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We are the 8.06%

In February, Starboard Value disclosed a 1 million-share stake in Bristol-Myers Squibb, which works out to less than a tenth of a percent of 1.6 billion outstanding shares. Starboard claims to have held meetings with management, but with little leverage, it failed to persuade management to back off from the $91 billion transaction.

Starboard has been the most vocal opponent, but it isn't the largest. Wellington Management and its clients own around 8% of Bristol-Myers, and the firm listed complaints that echo Starboard's.

Too optimistic

Starboard and Wellington agree that buying Celgene places too much risk on Bristol-Myers, and that management is being too optimistic about its chances of coming out ahead in the long run. Big pharma mergers have a poor track record, and Starboard pointed to the $66 billion merger between Actavis and Allergan. To make a long story short, Allergan shares have lost 50% of their value since the deal closed four years ago. 

Rather than take a huge risk with Celgene, an increasing number of Bristol-Meyers shareholders favor a less aggressive strategy. Instead of reaching for the Hope diamond, Starboard and Wellington would like to see Bristol-Myers continue stringing small pearls together with the enormous cash flows its operations generate.

Hand drawing a scale balancing risk and reward.

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Bristol, be patient 

Starboard fumed about Bristol's decision to throw it all away to make a risky bet on Celgene following just two weeks of due diligence. That's because Bristol-Myers is doing well at the moment. In 2018, adjusted earnings per share rose 41%, and plenty of investors would like those profits heading their direction in the form of dividends and buybacks. 

Right now, Bristol-Myers is one of a few big pharmaceutical companies that have more cash on hand than debt, and its balance sheet is getting stronger. By Bristol's own calculations, surging sales of Opdivo and Eliquis will help generate $37 billion in free cash flow over the next five years. That would give the company enough firepower to build up its pipeline through a combination of partnerships, licensing deals, and smaller acquisitions.

But the whole necklace was on sale

Bristol countered by claiming it had already looked all over for pearls to string together but couldn't find any. Celgene's already done the hard work of stringing together dozens of small to medium-sized pearls. Acquiring the biotech dealmaker would be like buying a whole jewelry box. 

Bristol-Myers gave the appearance of just being lazy. There isn't a scarcity of attractive opportunities; it just takes a ton of work to sift through all the useless muck. The company began its search by looking at just 77 biopharma opportunities. In 2018 alone, 60 new biopharma companies reached the U.S. exchanges, and at least twice as many privately held drug developers sprang into existence. 

Celgene's three key drugs -- Revlimid, Pomalyst, and Abraxane -- generated a combined $12.8 billion in sales last year, but they're going to start falling off a patent cliff in a few years. Before they do, Bristol thinks it can squeeze $45 billion in free cash flow from Celgene's entire line of marketed drugs and save at least $20 billion in cost synergies over the next five years. 

A man with a loosened tie chews on a pencil as he looks at a ticker tape in his hand.

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By Bristol's calculation, it only needs to squeeze out another $15 billion from Celgene's pipeline to make the deal pay for itself. Ozanimod, luspatercept, and fedratinib are all potential blockbusters that have already succeeded in pivotal studies. Celgene's pipeline also boasts two cellular cancer therapies that should produce pivotal data soon.

Starboard argues that Bristol can't possibly squeeze out $20 billion in cost synergies unless most of those shared expenses involve developing drugs still in the pipeline. By Starboard's calculation, the value of Celgene's pipeline and synergies that won't be realized unless those assets succeed add up to $29 billion.

This is happening

Wellington and Starboard are probably right to suggest that Bristol-Myers Squibb take the big juicy bird in its hand instead of risking a loss on Celgene. Unfortunately, the odds that shareholders will vote down Bristol's offer are pretty slim, partly because many of the institutions that own shares of Bristol-Myers also have large Celgene positions.

Bristol's plan is exciting, while Starboard's complaints are complicated enough that they're bound to be ignored. If you're a Bristol-Myers shareholder, you'd better start cheering for Celgene's pipeline.