Proving the adage that one should be careful what one asks for, ImClone Systems
In a proxy statement filed with the SEC today, the majority of the company's board of directors voted to recommend against Icahn's proposal to eliminate six of the company's twelve directors and effectively give Icahn control of ImClone, as he would then control four of the remaining six seats on the board and be able to pass any proposal he wished.
The reason that the majority of the directors on the board are against Icahn is because he already owns 14% of the shares of the company's common stock. If he takes control of ImClone's board, he might then request a waiver to rules against allowing any shareholder to own 15% of the ImClone shares without making an offer to purchase the remaining shares of the company. The relevant Delaware corporate law is stated as such:
a stockholder acquiring more than 15% of the outstanding voting shares of a company ... may not engage in certain business combinations with the company for a period of three years following the date on which the stockholder exceeds the 15% threshold unless, prior to such date, the board of directors of the company approves ... the transaction that resulted in the stockholder becoming an interested stockholder.
Basically this means that if Icahn can gain control of the board of directors, he can then get approval from the board to acquire a larger than 15% stake in the company. The next question I can already hear you asking yourself is, "Why would Icahn even want to acquire a larger stake in ImClone?"
From the proxy filing released today, it was revealed that ImClone has asked Icahn to make an offer to acquire the company, but he flatly refused. So we know that buying out ImClone is probably not his intention.
It was also revealed in the proxy filing that other companies have offered to acquire ImClone in the past, at $35.50 per share in July and then $36 a share in stock this September. The interesting thing is that the $36 a share offer from the unnamed "major international pharmaceutical company" was contingent upon Icahn's approval of the deal. But he rejected the deal, so we know that he doesn't want to trade his ImClone shares for a possible small premium in another pharmaceutical company.
Here is what I think Icahn is trying to do, based upon his past experiences with other companies that he has been a part of: First, he wants the board of directors to grant him that waiver and allow him to increase his holdings above the 15% threshold. Then he will buy more shares of ImClone, possibly up to a 49% stake in the company. Finally, when he has acquired all the shares that he wishes, he will then (through his majority control of the board -- if he can get the six directors booted) have ImClone declare a Dutch auction to buyback a boatload of shares of the company with the over $1 billion and growing cash pile sitting on the balance sheet.
The Dutch auction would provide Icahn an easy way to cash out his shares in the company at a potentially lucrative premium to what he paid for the majority of his 12 million share, 14% stake of ImClone earlier this year.
The way a Dutch auction stock buyback works is that the price per share at which shares are purchased is based upon the highest price at which the company can buy all the shares it has proposed to purchase. This means that Icahn would probably be setting the price at which shares are bought back from the company, since he is the second largest holder of ImClone shares behind Bristol-Myers Squibb
My scenario isn't just a figment of my imagination. Icahn has done this sort of thing in the past with more than one company. It's one of his most popular modi operandis for making money, and is known in the financial industry as greenmail.
For example, last year Icahn cashed out his shares of generic drugmaker Mylan Labs
Icahn did exactly the same thing with his stake in energy company Kerr-McGee (now owned by Anadarko Petroleum Corporation). Last year, he proclaimed that he would try to get elected to Kerr's board, and only dropped his attempt when the company declared a tender offer to buy back $4 billion worth of the company's shares at prices that would be 15%-24% higher than what Kerr's shares were trading at beforehand.
Regardless of what happens to ImClone with Icahn and his possible board shakeup, this proxy battle comes at a most inopportune time for the company. ImClone is about to engage in a fight for its life, as Amgen
As I wrote last week, Vectibix will initially be priced 20% below Erbitux; is associated with less painful rashes than Erbitux; and requires only bi-weekly dosing, compared to Erbitux's weekly dosing. Combine this big competitive threat with the patent battle going on for Erbitux, and ImClone's management has a lot on its plate.
ImClone's board of directors is partly right when they say that giving control of the board to Icahn will be detrimental to shareholders. Long-term shareholders who choose not to go along with any possible Dutch auction or other share buyback that may be initiated in the future will be left holding a biotech company minus its cash hoard and facing an uncertain future (due to competitive and legal threats). Short-term shareholders that are able to cash out with Icahn, though, will possibly have a nice gain to take home. Maybe ImClone's board of directors should have envisioned this sort of scenario before they invited Icahn and his friends onto the board.
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