Without A Buyer For Bristol-Myers, Starboard’s Recipe Looks Less Substantial

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Could Starboard Value‘s “nutritional broth for cells” be to Bristol-Myers Squibb what salting the water was to Olive Garden?

This week, the activist published a 197-slide presentation outlining its objections to the merger of Bristol-Myers and Celgene, two enormous pharmaceuticals companies. Starboard argues the deal is riskier than Bristol-Myers is willing to acknowledge and sets out alternatives – a continuation of the “string of pearls” strategy of small acquisitions and partnerships that former Bristol-Myers CEO James Cornelius popularized, or a sale of Bristol-Myers.

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Like at Darden Restaurants, the importance of such a presentation is not that it is implemented like a manifesto – the water never was salted – but that it convinces shareholders that better alternatives exist. Unlike Wellington Management’s brief statement of February 27, an activist needs sharper arguments, pointing to weakness in the governance, process, and figures, to make up for its small, recent stake and lack of shareholder expertise. Jim Rossman, the head of Lazard’s shareholder activism group, says the work activists do to oppose announced transactions today "isn't like holding up a train with guns." As our in-depth story this week (subscriber only) makes clear, activists are becoming more sophisticated because the success rate for scuttling deals is low.

Evidently deeply researched, the deck nonetheless fell flat with some observers. Analysts at Jeffries (viewing the deal from Celgene’s perspective) said that it failed to provide a "smoking gun" and would not be enough to prevent proxy voting advisers from recommending in favor of the deal ahead of the April 12 special meeting. Bristol-Myers' own update, released on the same day as Starboard’s presentation, focused heavily on process and risk. Indeed, the company refreshed its board with input from an activist less than two years ago.

In addition, Cornelius himself is a supporter of the deal, comparing it to "buying the whole necklace" and suggesting "it eliminates paying potentially high individual premiums and minimizes certain risks associated with several smaller transactions."

Ultimately, Starboard’s argument that large pharmaceutical companies have been value-destructive is unlikely to hold water. Some deals have paid off, and others only look worse because of the financial crisis, even if Allergan and Teva are in crisis mode. In any case, Takeda’s acquisition of Shire last year despite activist opposition shows that there is still appetite. Without a buyer for Bristol-Myers, Starboard’s recipe looks less substantial.

As I write we still don’t know the outcome of Elliott Management’s proxy contest at Hyundai Mobis and Hyundai Motor but this should be apparent by the time of publication and will no doubt be covered on Activist Insight Online. The campaign has been an interesting one, not least because the activist’s board nominations gained more traction than its plans for large special dividends to improve the companies’ balance sheets. If it comes creditably close to victory, Elliott’s campaigns could be a spur for more activism in the country. For more on activism in South Korea, keep an eye out for our forthcoming issue of Activist Insight Monthly, which will be published in early April.

Quote of the week comes from Paul Singer, the co-CEO of Elliott Management, in this criticism of Lyft’s decision to undertake an initial public offering with supervoting shares for management. Given Carl Icahn is a backer of the ride-hailing firm, it shows even activists can fall behind different governance structures.

"Those with the insight and daring to found a business deserve our respect," Singer concluded. "But once they sell the vast majority of the company to the public, they should not be allowed to run it forever without any shareholder input. Public ownership must mean public accountability."

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