Goodyear flashback time for Rick Reiff

To contact Rick, email him at rr@rickreiff.com

For Rick Reiff, former BJ business writer who has been executive editor of the Orange County Business Journal, California’s second-largest business weekly, since 2000, it’s “Here we go again.” He compares Irvine, California-based Allergan’s struggle to avoid a hostile takeover by Canada’s Valeant Pharmaceuticals to Sir James Goldsmith’s greenmail attack on Goodyear in 1986.

 

Rick Reiff

The BJ got one of its four Pulitzers for its coverage of an event that sucked millions of dollars out of America and, in the long run, contributed to the exit of the rubber shops in what used to be the Rubber Capital of the World.

Chicago native Rick also is a media/journalism professor at Chapman University in Orange, California. And pretty proficient at golf.

Rick once was BJ Guild president and had the foresight to push for a 401(k) in negotiations. The Guild got that financial advantage in 1989. 

Rick’s latest story on corporate raiders:

Allergan Assessment: Déjà Vu & Differences

Scribe Who Was There Compares Hostile Bid for Drug Maker to 1980s Raid on Goodyear

by Rick Reiff, Orange County Business Journal
IRVINE, CA — May 19, 2014

A celebrated company comes under attack from corporate raiders, putting thousands of jobs in jeopardy, threatening a leading corporate citizen, and triggering debate over the peril of financial markets.

The story is playing out in Orange County as Allergan Inc., the Irvine-based drugmaker best known for wrinkle remover Botox, combats a hostile $46 billion takeover bid from Canadian-based rival Valeant Pharmaceuticals International Inc. and hedge fund billionaire Bill Ackman.

I covered this sort of story before—back in 1986, when industrial giant Goodyear Tire, the company in the company town of Akron, Ohio, came into the cross-hairs of British raider Jimmy Goldsmith.

The basic script is the same—just substitute Allergan for Goodyear, Ackman for Sir James, and Valeant for Hanson Trust, the British conglomerate that partnered with Goldsmith. You don’t even have to change the name of the target’s key financial adviser—it’s Goldman Sachs for Allergan, same as it was for Goodyear.

There are other similarities. Ackman, like the late Goldsmith, is a financial brawler with social register status. Both deftly played the SEC disclosure rules to mask as long as possible their attack and the size of their accumulated stakes. Valeant CEO Michael Pearson is oft-reviled for his roll-ups and cost-cutting, much as were Hanson’s James Hanson and Gordon White (both like Goldsmith, knighted.)

CEOs
The CEOs have different makeups but similar passion for their companies, which they see as serving not only shareholders but customers, employees and the community. Robert Mercer was a Goodyear lifer who worked his way up from sales. Allergan’s David Pyott is a global citizen who speaks four languages and, although not yet a knight, is a Queen’s Commander. Like Mercer and Goodyear, Pyott and Allergan are civic leaders, active in local business, educational and philanthropic activities.

The script calls for lots of lawyers, of course, and also PR people. As did Goldsmith, Ackman and Pearson present themselves as change agents fighting to maximize shareholder value. Allergan, as did Goodyear, portrays its attackers as trying to gut a great company for a one-time gain.

Goodyear’s Mercer, bristling after an onslaught from financial forces that a future generation of CEOs would accept as a fact of corporate life, declared: "People think the bottom line is everything. Well I wish that were so. But we’ve got some social consciousness that is involved around here. If that’s taking it away from the shareholder, then we’ve been taking it away for 88 years."

Allergan’s Pyott prefers to make his case on the enemy’s terms: "Valeant’s model of cutting and slashing really doesn’t work for more than a very short period of time." It "substantially undervalues Allergan," and it entails "unnecessary risks" given "the unsustainability of Valeant’s business model."

Standouts
Both companies are standouts in their field. Goodyear was the biggest tire maker in the world (today it’s third), and it was a fixture in the blue-chip Dow Jones Industrial Average (it was dropped in 1999.)

Allergan is a leader in specialty pharma, billed as the fastest-growing ophthalmic company.

In both cases, the raiders accuse the companies of over-spending on R&D and other overhead. Goodyear was chided for having "too many vice presidents and golf memberships." Valeant’s Pearson faults Allergan’s research army: "We don’t need people sitting behind desks."

But the raiders at times trip on their hubris, raising questions about how much they know, or care to know, about their targets.

Goodyear’s Mercer said Goldsmith privately complained to him of the company’s "recent excursion into aerospace."

"My God, Mr. Goldsmith," Mercer replied, "We’ve had aerospace since 1911!"

Similarly, a Pearson zinger aimed at Allergan backfired: "Have you seen their golf course?" he asked analysts. "Yeah, they have a golf course."

No they don’t.

There is little question that by 1986 Goodyear had become far-flung and top-heavy, with a stock that hadn’t moved much in years. It was roundly criticized for investing $1.5 billion in a money-losing pipeline connecting California oilfields with Texas refineries.

The case against Allergan is harder to conceive. In 16 years under Pyott, it has grown from a relatively small eyecare company into a global leader in four pharmaceutical and medical device lines. It claims the distinction of being the "world’s largest medical aesthetics company," serving those who wish to enhance their appearance from the waist up.

Revenue has increased more than five-fold; the stock price had risen more than 1,000% even before the takeover-induced spike.

The rap on Allergan? For one, that it’s almost too good, spending more than $1 billion a year—a staggering 16% of sales -- on research and development.

Pyott, who is roundly lauded and last year was rated 26th best CEO in the world by Harvard Business Review, boasts of the outlay as a critical factor in maintaining growth.

Pearson dismisses it as a waste, contending that most drugs get discovered by universities and entrepreneurs, not corporations.

Critics also say Allergan is sitting on too much cash, some $6 billion. Pyott had announced plans to deploy some of that money in acquisitions before Valeant-Ackman struck.

Disadvantage
Allergan has one definite disadvantage: the relatively high U.S. corporate tax rate. It gives foreign drug companies an inducement to snap up American rivals, and is spurring Valeant, which has roots in Orange County but now counts on tax benefits that flow from its corporate home in Canada and a Bermuda-based subsidiary. Indeed, Allergan’s survival options include a possible "tax inversion," a foreign merger that would move Allergan’s tax domicile to a more favorable locale.

Goodyear prevailed by paying Goldsmith $91 million in what amounted to "greenmail"—an above-market price for his Goodyear stock, a tactic regulators subsequently prohibited.  In the aftermath, Goodyear was forced to do many of the things Goldsmith would have—selling off subsidiaries, doubling debt, and laying off thousands of workers. When the raiders attacked in 1986, Goodyear’s workforce in Northeast Ohio was 12,000, a third of what it was two decades earlier. Today it’s down to 3,000. But Goodyear is still based in Akron (the last of what was once four major tire makers), with a new headquarters complex to boot. And it is, perhaps more than ever, the town’s business and civic leader.

Orange County, likewise, has something at stake in the Allergan battle. When Valeant’s Pearson talks about cutting R&D and people behind desks, you can draw a big red circle around the campus at Dupont and Von Karman. Allergan wants an outcome that preserves the campus and all, or most, of its 2,500 jobs.

Differences? Obviously, Allergan is not Goodyear, and Akron is not Orange County.

With apologies to Botox, Goodyear is the more iconic company, with its rich industrial history, wingfoot emblem and, of course, the blimp. Goodyear has three times the revenue and five times the employees of Allergan, although Allergan has six times the market cap.

Akron, the faded Rubber City, is not as rich, big or diversified as sun-kissed Orange County. In fact, with its population having shrunk by a third since 1960, to just under 200,000, Akron is not even as big as Irvine.

While Allergan is an old company by OC standards—it was already 23 years old when it moved to Irvine in 1971—Goodyear’s Akron roots go all the way back to the end of the 19th century.

Community Response
When Goldsmith attacked Goodyear, the whole town and state of Ohio responded. A petition with 36,531 signatures opposing the takeover bid was sent to the White House. Groups held rallies, school kids drew caricatures of Goldsmith, folks and unions pulled their accounts from the local Merrill Lynch brokerage office to protest the firm’s alliance with the corporate raider. Akron’s congressman, the grandson of Goodyear founder Frank Seiberling, summoned Goldsmith to a contentious Capitol Hill hearing. (Goldsmith flexed his own political muscle later that evening, hosting President Ronald Reagan at a conservative think tank dinner.)

While there is much community concern and sympathy for Allergan, there’s unlikely to be any rallies. Orange County sees companies come and go all the time, but heretofore on balance, it’s been a winner in the dynamic give-and-take.

The Goodyear battle took place at an inflection point in American finance. 1986 was the year of the first hostile takeover wave, of Ivan "greed is good" Boesky, of junk bond wizard Michael Milken. (Goodyear hired Milken’s Drexel Burnham Lambert as an adviser, if for no other reason than to keep it away from Goldsmith).

Despite much antipathy toward these "barbarians at the gate," they largely prevailed (jail sentences aside), calling out inefficiencies in corporate America and setting up new systems for directing capital to where it could be most productive.

The inflection point now feels different, not so much about corporations as the circumstances they operate under. If Goodyear was prey to leverage, Allergan appears a victim of tax arbitrage.

In fact, the tax situation could become a hot political issue—Allergan is hardly an isolated case. Two drug industry giants, Pfizer Inc. and Walgreen’s, also are considering foreign mergers in order to escape the U.S. tax rate.

The Allergan battle might also be a test of Wall Street, pitting "value" investors against hedge funds and others with short-term horizons.

It’s one thing to flog Goodyear for becoming bloated. It’s another to savage Allergan for trying to ensure long-term profitability through R&D.

Indeed, a number of Allergan’s institutional investors have expressed concerns that Valeant stock they’d receive in a takeover could depreciate.

Dan Davidowitz, chief investment officer of Polen Capital Management, told the Wall Street Journal that he thought Allergan could match the Valeant price "just from another couple of years of compound earnings growth. So I don’t think this is that attractive an offer."

A company, and all it entails, hangs in the balance.

(Executive editor Reiff was the lead reporter for the Akron Beacon Journal's coverage of the Goodyear takeover battle, which won the 1987 Pulitzer Prize for general news reporting.)