Although most people have been jumping on the bandwagon to support the merger of Swiss pharmaceutical giant Novartis
California-based ValueAct Capital announced its intention to douse the merger with a little cold water. The hedge fund has suggested that even with the sweetened offer from Novartis, the flu-vaccine maker is being acquired for a song. It charges that Novartis seriously undervalued Chiron's worth and that just by applying the biotech's historical multiple of 25, the stock should be valued at least as high as $120 in 2010. Discounted to today, an acceptable offer for the company would then be far above the $45 that was ultimately accepted.
ValueAct didn't stop there, however. The hedge fund acquired a 5% position in Chiron to make its displeasure known. In a letter attached to its filing with the Securities and Exchange Commission, ValueAct charges that Novartis used its 46% ownership and its position as a member of Chiron's board of directors to unfairly influence the bidding process.
Novartis, ValueAct charges, had access to "material inside information" not available to the public that should have precluded it from making an offer for the company for at least two days after Chiron announced that it had received a "generally favorable" letter from the Food and Drug Administration, albeit with conditions, to return to the flu-vaccine market. Instead, Novartis made its bid on the same day and used the stock's price of that day to peg its offer and claim it was offering a 23% premium.
Since then, and despite favorable news and a return to the vaccine market approximately a month and a half after the FDA letter, Chiron's stock has hardly moved beyond the $45 per share that Novartis offered. ValueAct believes that $45 is the starting point for a discussion on the value of Chiron. That is the price around which it was trading before the vaccine-contamination debacle that caused its stock to plummet. Now that it is back in the vaccine market, admittedly with more competition than previously, any premium being offered should be above and beyond the $45 share price, not the $36-per-share figure that Novartis used, ValueAct says.
ValueAct's solution is for Chiron to go to binding arbitration. Under an agreement signed when Novartis acquired its stake in 1994, Chiron had the right to reject all of Novartis' bids and force the pharmaceutical to seek binding arbitration. For its part, Chiron could delay any arbitration hearing for a year, thus allowing all of the favorable news developments that have arisen to be reflected in the company's share price. That's the point at which any discussions for an acquisition of Chiron would begin again.
The hedge fund has a tough road before it to block the merger. It controls only 5% of the stock, the Federal Trade Commission has approved the acquisition, and Novartis has said it won't raise its offer. Further, while another company has not moved in to make a counteroffer, another company might not have wanted to do so anyway, considering that Novartis owned such a huge swath of the biotech's stock to begin with. The one option it has, and the one that probably drove the hedge fund to acquire its 5% stake, is to demand "appraisal rights."
Seeking appraisal rights allows a dissident shareholder to challenge a merger's offer price. If a court agrees that the acquisition price was too low, the dissident shareholder receives a higher price for his or her shares while the other shareholders get the original merger price.
Subscribers to Motley Fool Hidden Gems are undoubtedly familiar with this concept, since it has happened several times with the newsletter's selections that have been acquired. For example, when Metrocall sought to acquire Gems selection Arch Wireless to form USA Mobility
Whether ValueAct ultimately wins out or is rebuffed in its efforts, its charges of unfair dealing by Novartis are cold comfort to other shareholders. For now, Novartis has circled the wagons and remains firm in its bid.
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