Institutional investors can impact corporate decisions Current strategies can limit future options Poor governance undermines shareholder value Hubris can derail good decision making 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 ten- der 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 major- ity 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 prac- tices 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 plum- meted, reducing the premium to Perrigo's share price from 34% when the offer was first made to diminishing premium and Mylan's poor governance practices could not be overcome. Analysts on Wall Street also expressed a sigh of relief as they be- less than 3%. Ultimately, concerns about the lieved that the Mylan offer price overvalued Perrigo. In April 2015, generic drug leader Teva Pharmaceuticals had tried to acquire Mylan. Within months, Mylan attempted to buy Perrigo, but the latter successfully fended off Mylan 8 months later. Mylan, one of the world's largest generic drug firms, was always facing an uphill fight to acquire Perrigo, the leading manufacturer of drugstore-brand products. Why? Because it is difficult to acquire a firm whose board and management do not want to sell. Historically, hostile takeovers eventually end either with the target firm relenting following the acquirer's willingness to raise the offer price or with the target able to find another suitor to buy it instead. However, Mylan, perhaps out of senior management's hubris, thought it would be relatively easy to acquire Perrigo. To under- stand why we need to look at past corporate actions taken by Perrigo and how such action limited the firm's options in defending against Mylan's unsolicited offer. In 2013, Perrigo implemented a corporate inversion in which it reincorporated in Ireland in an effort to move from the United States to a more favorable tax environment. However, Ire- land's corporate antitakeover laws tend to be much weaker than elsewhere. Mylan reasoned that it could bypass Perrigo's board and management and make their offer for the firm directly to its shareholders and that there was little Perrigo's board and management could do due to lax antita- keover laws. While on paper this looked like a good idea, in practice it turned out to be far more challenging. While Perrigo could not utilize more traditional antitakeover defenses that were largely pro- hibited by Irish takeover law, it was able to exploit Mylan's problem Mylan disclosed on October 30, 2015, less than 2 weeks before the tender period was to close, that it was under investigation by the US SEC that was probing potential conflicts of interest with the firm's board members. Not only did Mylan wait a full 7 weeks into tender period to make any disclosure about this SEC subpoena, but also it buried the disclosure in a footnote on Page 53 of a Friday-afternoon SEC filing that never explained the specific subject of the SEC's inquiry. Further- more, Mylan's own shareholders were suing the firm for not properly disclosing its highly restric- tive antitakeover defenses when it sought a vote for its prior inversion transaction, the process by which Mylan had reincorporated in the Netherlands (for more information on inversions see Chapter 12). In another display of disregard for its shareholders, Mylan used an obscure part of Dutch law allowing a target firm to put control of the firm into a foundation. While such control would be temporary, it effectively allowed management to circumvent a shareholder vote on the Teva acquisition attempt. atic governance practices. Perrigo's board after repeatedly rejecting Mylan's offer encouraged its shareholders to reject the Mylan tender offer by noting that it "substantially undervalues our Company and did not ad- equately compensate shareholders for our exceptional standalone growth prospects." The Perrigeo board also pointed out that shareholders had realized a 970% total return since 2007, which dwarfed the total return to Mylan shareholders during the same time period. They argued that continuing the firm's current business strategy would be more lucrative than selling to Mylan. Perhaps Perrigo's most effective argument against t poor governance practices of Mylan would undermine the long-term value of shares that would be received by those tendering their Perrigo shares. Adding support to Perrigo's claims was the fact that Mylan had consistently received the worst possible governance score from ISS, a leading independent proxy advisory firm. In response to Perrigo's allegations, Mylan threatened to delist Perrigo shares if it gained majority control making any such shares outstanding highly illiquid Perrigo countered that these were just scare tactics and represented another illustration of Mylan's disregard for shareholder rights. he Mylan offer was its assertion that the Despite these challenges, in early November Mylan stated in a press release that it was "highly confident" it would succeed in the takeover. Mylan initially stated that it expected to open a tender offer for as much as 80% of Perrigo's outstanding shares but later reduced that figure to 51% of outstanding common shares, enough to gain a controlling interest. The reduction in this thresh- old figure from 8090 to slightly more than 50% reflected a more realistic assessment of Mylan's prospects The deal did not appear to make sense from the outset. Why? It did not involve the more com monly used "friendly approach" in which the acquirer seeks to get support from the target's board and management. Moreover, Mylan would not have realized a spike in earnings per share as a re- sult of the deal as the number of new shares issued would offset the addition of Perrigo's earnings Furthermore, Mylan's acquisition of Perrigo would not have expanded Mylan's share of the overall generic prescription market, as Perrigo dominated only a subsegment of the market for cheaper drugstore brand versions of drugs such as Advil and Neosporin. Why t rigo? Acquiring Perrigo would make Mylan a more diversified health care firm helping to offset increasing competition in the generic drug market hen did Mylan want Per- Decisions made years earlier had left Perrigo vulnerable to takeover. Perrigo surrendered highly effective defenses when it moved its legal domicile to Ireland. Prior to its corporate inversion, Per- rigo had been incorporated in Michigan. Michigan is generally considered to have strong antitake- over laws, including a business combination law limiting parties that have acquired 10% or more of the shares of a firm from acquiring the remaining shares for 5 years. Because it would take so many years to gain a controlling interest, most acquirers would be encouraged to look for targets not headquartered in Michigan. Also, under Michigan law, the board of directors is allowed to consider the interest of other stakeholder If a combination would threaten substantial layoffs at the target firm, the takeover could be disal lowed under state statutes. groups such as em ployees when deciding to accept a ta keover bid As a US-based firm, Perrigo had several defensive measures in place including a staggered board allowing only one-third of its directors to be up for election in any year. The firm's bylaws also allowed it to adopt a poison pill defense either before or after a bid had been made. The pill meant that the firm could ward off any unwanted suitor unless the board would rescind the pill The staggered board meant that any effort to change the composition of the board would take at least 2 years to replace the majority of board members with those willing to rescind the poison pl Now incorporated in Ireland, Perrigo has been stripped of these defensive measures as they are prohibited by the Irish laws applying to takeovers. Consequently, Perrigo was forced to rely primarily on other means to dissuade its shareholders from tendering their shares. The absence of significant takeover defenses had been a motivating factor in Mylan's initiating a hostile tender of fer for the firm. Once Mylan withdrew its offer, Perrigo's shares fell 6% to $146.90 in a single day, while Mylan's shares jumped 13% to $48.78 per share. The wild swings in the share prices of these two firms re- flected the unwinding of speculative bets. That is, investors who had purchased Perrigo shares in anticipation of their rising to or near the offer price sold their holdings and investors who antici pated a drop in Mylan s share price cove covered their short positions. Mylan had been at the center of a three-way fight while pressing its bid for Perrigo and fend- ing off its own takeover bid from Teva. Ironically, neither deal materialized as Teva withdrew its bid and Perrigo shareholders voted against the Mylan tender offer. Millions of dollars in fees paid to investment bankers, accountants, lawyers, and consultants were paid despite noth ing having been accomplished. Mylan's management and board had been distracted from the ongoing strategic and operating management of the business. During this time, other attractive investment opportunities may have been missed resulting in significant cost to the firm's share- holders in terms of potential foregone profits. In the end, perhaps driven by hubris, Mylan's management and board continued to demonstrate that they were poor stewards of shareholder wealth .

1. Question: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.

Answers of Case Study with Abstract,Conclusion and Reference