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.
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| 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.)
