Things looked good for Mylan NV, a leading generic pharmaceutical drug maker, midday on November 13, 2015, as the early results of the firm’s campaign to acquire Perrigo appeared promising. The votes of more and more index fund shares supported Mylan’s proposed takeover of Perrigo Co., a maker of store-branded generic drugs. This date marked the last day Perrigo shareholders could tender their shares, a process that had begun with Mylan’s initiation of a tender offer for a simple majority of Perrigo’s outstanding common shares on September 15, 2015.

Acceptance of Mylan’s bid, initially valued at \($26\) billion and consisting of \($75\) in cash and 2.3 new Mylan shares for each Perrigo outstanding, appeared to be in reach. In contrast, the Perrigo board of directors and management was nervous, as they had received support from the majority of their investors in Israel but were alarmed at the number of index fund votes in support of the takeover.

But the heady feeling among Mylan’s board of directors and senior management was soon to turn grim. By evening, Mylan’s position appeared to weaken when a tally of votes by the national stock clearinghouse, Deposit Trust Corporation, showed that Mylan was short by about 18 million shares of the number needed to gain a controlling interest in Perrigo. Had they won control of the firm, Mylan reasoned they could implement a backend merger at a later date to “squeeze out” the shareholders who had been unwilling to tender their shares.

Nearly all the major mutual funds supported Perrigo, with only Vanguard Group supporting Mylan. Other major mutual fund groups did not even vote, including Blackrock, State Street Global Advisers, and Fidelity Investments. Despite an aggressive marketing campaign to garner investor support, Mylan failed to convince enough investors that they would be better off owning shares in a combined Mylan/Perrigo company. In the end, Mylan was able to garner only 40% of Perrigo’s outstanding common shares.

Even though Mylan had promised to make certain changes to its questionable governance practices immediately following its acquisition of Perrigo, the declining value of its shares made the Mylan shares less attractive. Teva Pharmaceuticals’ bid to acquire Mylan earlier in 2015 had inflated the value of Mylan’s shares to reflect most of the anticipated premium. Mylan was using the inflated value of its shares to make a bid for Perrigo. When Teva later withdrew its offer, Mylan shares plummeted, reducing the premium to Perrigo’s share price from 34% when the offer was first made to less than 3%. Ultimately, concerns about the diminishing premium and Mylan’s poor governance practices could not be overcome. Analysts on Wall Street also expressed a sigh of relief as they believed that the Mylan offer price overvalued Perrigo.....

Discussion Questions:

1. What was Perrigo’s main defense against Mylan? Why was so much reliance given to this tactic? Speculate as to why shareholders accepted Perrigo’s board and management’s arguments.
2. How did corporate inversions undertaken by each firm impact the outcome of the hostile takeover attempt? Be specific.
3. Identify the takeover tactics and defenses employed by Mylan and Perrigo, respectively.
Explain why each may have been used.
4. What does the reaction of investors to the breakup of the deal tell you about what they were thinking?
5. Under what circumstances does the combination of a poison pill and a staggered board make sense for the target firm’s shareholders? Be specific.
6. Using the information in this case study, discuss the arguments for and against encouraging hostile corporate takeovers. Why might a hostile takeover of Mylan be justified?
7. Explain why a friendly approach often is preferred to a hostile takeover. Be specific.
8. Explain what caused the share prices of both firms to fluctuate wildly when the results of the tender offer solicitation were made public. Be specific.
9. Explain how a backend merger works and what it means to “squeeze out” the remaining Perrigo investors.
10. Both Mylan and Perrigo fought aggressively to ward off unwanted suitors. As such, both could be accused of trying to entrench senior management and their boards of directors.
Do you believe that the actions of both firms were consistent with the best interests of their shareholders? Explain your answer.