Biotech Values

[DewDiligence]

Update: The APD-ARG hostile takeover failed* and, in the process,
the poison-pill defense received a boost from the Delaware Chancery
Court. This has ramifications for biotech buyouts insofar as many small
biotech companies are incorporated in Delaware and have poison pills.

*As an APD shareholder, I’m happy the buyout failed. APD surged to
a new high today on news of the deal’s termination.

http://www.reuters.com/article/2011/02/17/us-airgas-poisonpills-idUSTRE71G03W20110217

›Airgas Verdict Revives Poison Pills

Wed Feb 16, 2011 7:20pm EST
by Timothy Sifert

NEW YORK, Feb 16 (IFR) - Tuesday's legal decision to uphold Airgas's use of a "poison pill" defense against rival Air Products & Chemicals' takeover bid is a bonus for corporate board members in the US: it sharpens one more tool to defend against hostile bidders.

While these shareholder rights schemes, or poison pills, aren't as popular as they once were, the Delaware Chancery Court's verdict last night gives corporate boards in the US cause to reconsider their utility.

The number of US-incorporated companies with poison pills in place is a fraction of what it was. At the end of 2001 there were 2,218 takeover-protected companies, compared to 869 at the end of last year, according to FactSet SharkRepellent, which tracks the use of poison pills.

In fact, the figure is at its lowest in two decades, owing to changes in both corporate governance and hostile takeover practices.

Airgas's (ARG) successful avoidance of Air Products (APD) breathes new life into the use of poison pills.

"If the case had ended differently the number of poison pills would have reduced even more," said John Laide, vice president, senior product manager at FactSet Research Systems.

"I think this ruling endorses that position. It will show other companies that the courts endorse them putting a poison pill in place."

DEFENSE MECHANISM

A poison pill is a takeover defense that makes it costly and difficult to buy a company if any party buys a certain percentage of shares, usually about 20%. In a popular scenario, a target company might flood the market with new shares, making a hostile acquisition prohibitively expensive.

The prophylactic measure is intended to give a board of directors time to find alternatives and explain to shareholders why a bid isn't tenable.

It can also be used, however, as a way for management -- in shareholders' best interests or not -- to stay the usual course and keep their jobs. In either case, shareholders are prevented from deciding on their own.

Corporate scandals during the last decade or so have changed the way management and shareholders look at corporate governance. At the same time, poison pills have gone through a metamorphosis of sorts.

For example, in the past, boards would vote a 10-year poison pill in place and decide whether to renew when it expires. But as poison pills have become incompatible to the idea of good corporate governance -- and hostile bidders have become savvier -- boards have had to change their ways, Laide said.

A new variety of takeover protections has surfaced as a result. New poison pills have shorter durations and variable terms.

"Now what you have is specific-purpose pills," Laide said.

What's more, boards can have a general plan ready "on the shelf" to be adapted should a need arise. These schemes are not immediately discernible. "There's no public disclosure of shelf pills," Laide said.

GAMBIT PAYS OFF

Air Products, which had been trying to buy Airgas for about a year, was not happy with the decision. The company proposed buying Airgas for $70 per share in an all-cash offer. Airgas's board countered, saying it was worth $78 a share.

In the end, Air Products contested that the Airgas board was using the poison pill to defend against a takeover of any kind, shareholder-friendly or not.

"Despite the public statements of the Airgas board, we are convinced they are unwilling to sell the company at any price," said John McGlade, Air Products, chairman, president and CEO during a conference call this morning to discuss the decision.

Airgas's gambit of going to the courts rather than to its shareholders to decide worked. Air Products management is putting the experience behind it. [Thankfully, IMO.]

"The chapter is now closed, and we are moving on," said Paul Huck, CFO, Air Products. "We've withdrawn our offer and will sell our Airgas shares."

Air Products, owns as of this morning, about 1.5m shares of Airgas.

The judge in the case said that methods for defeating a poison pill have been in place since 1985 and his ruling does not endorse a "just say no" approach to a hostile bid.

It's an unfortunate decision now that the M&A market is gathering ground. US mergers and acquisitions so far this year total $220.8bn, according to Thomson Reuters data. That's more than the combined volumes for the same periods in 2010 and 2009, when smaller, though more, trades were completed.

In the long run, however, the ruling doesn't exactly spell doom for all shareholders in search of value. As a result Air Products will resume share repurchases this year. It has $650m left over on its authorization.‹