Beleaguered Valeant Pharmaceuticals International announced on Friday, November 6th, that 1,297,399 shares pledged to Goldman Sachs against loans made to company chairman and CEO J. Michael Pearson were sold by Goldman Sachs on November 5, 2015. The bank was holding the shares as collateral for loans made to Pearson.
Although this whole situation is apparently entirely legal and above-board, industry analysts point out that Goldman apparently felt it had to pull the trigger on the collateral sale given the recent free-fall in the price of Valeant shares.
More on Goldman Sachs selling Valeant CEO shares
Back in 2014, the BoD at Valeant allowed Pearson to put up around two million shares for collateral for a personal loan. As of this spring, two million shares represents 20.19% of Pearson’s beneficially owned shares.
Seth Klarman: Investors Can No Longer Rely On Mean Reversion
"For most of the last century," Seth Klarman noted in his second-quarter letter to Baupost's investors, "a reasonable approach to assessing a company's future prospects was to expect mean reversion." He went on to explain that fluctuations in business performance were largely cyclical, and investors could profit from this buying low and selling high. Also Read More
According to the Friday statement from the company, CEO Pearson pledged the shares to Goldman Sachs for loans of close to $100 million that he used for financing several charitable contributions (including a substantial donation to Duke University), helping to fund a community swimming pool in his home town, purchasing Valeant shares, and to apply toward a number of tax obligations related to the vesting and payment of Valeant equity awards as compensation for his services to the firm.
Apparently, Goldman Sachs wanted repayment of the loans to Pearson, so it was agreed that the bank would sell sold the shares it was holding in order to satisfy the loans. The proceeds from the share sale by Goldman Sachs will be used to repay the loans, the loan agreements will terminate and there will be no outstanding debt remaining.
Pearson agreed to not take a salary back in January, and all compensation will be cash and stock incentive awards based on performance.
Statement from Valeant CEO Michael Pearson
“Since joining Valeant, I have not sold any shares provided to me as compensation, and it was not my desire that shares be sold now,” Pearson noted. “I have complete confidence in Valeant’s ability to move forward and continue meeting our commitments to patients, doctors, and shareholders.”
Share are currently trading at about $78 a share. But, Mizuho analysts think investors are over-selling the stock. They note in a report from November 6th, that the company has a liquidation value of over $100 a share.
Analysts from BMO think that Pearson leaving the company would be bad news.
They state in a report from Thursday:
We suspect that the decline is primarily related to Mr. Ackman’s comments published today in the Wall Street Journal suggesting that Valeant’s CEO, Mr. Pearson, might have to go. The article discloses conversations between Mr.Ackman and Valeant’s lead director, Robert Ingram. According to the article, Mr. Ackman told Mr. Ingram “If Mike [Pearson] hides in the bunker on this, he can’t be CEO.” Moreover, according to the article, Mr. Ackman told Mr.Ingram “that Valeant needed a leader to repair the company’s reputation, including testifying before Congress, and that’these are not Mike’s best skills.’”