Valeant makes yet another acquisition: Salix Pharmaceuticals (Part 11 of 12)
Could this deal get competitive?
For merger arbitrage professionals, competitive deals can make your quarter. If you get two companies bidding against each other, a 1% gross spread can easily become 10% by the time everything is said and done. Could the Salix–Valeant merger get broken up by an interloper?
Why did Valeant do a tender offer?
First, consider the optics of the transaction. Salix (SLXP) had been in discussions with Allergan (AGN) prior to its inventory issues. Salix announces it have an inventory problem and the stock collapses. Valeant (VRX) swoops in, takes a look, gets comfortable with the inventory problem, and then chooses to buy the company with a cash tender offer.
Companies choose to do cash tender offers for a few reasons. Typically, they are done for smaller acquisitions, but this is not a small transaction. Typically, buyers pursue this path because they want to get the deal done quickly, and they are worried about a competitor. While Allergan is now being bought by Actavis, there are other companies that could be interested in their pipeline.
Think about this: Valeant has chosen to do a cash tender offer, when it would be completely reasonable to go with a normal 3–4 month time frame given that a big FDA decision is coming in May, and it has inventory issues. Valeant gave Salix what appears to be protection that the deal will go through even if Xifaxan is not approved for irritable bowel syndrome (or IBS) by the FDA. Why would you do that unless you thought you were buying an asset on the cheap and wanted to seal the deal before anyone else could come in to challenge you?
Other merger arbitrage resources
Other important merger spreads include the deal between Hospira (HSP) and Pfizer (PFE). For a primer on risk arbitrage investing, read Merger arbitrage must-knows: A key guide for investors.
Investors who are interested in trading in the healthcare sector should look at the Health Care Select Sector SPDR Fund (XLV).
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