How Starboard failed to derail a mega-merger

Originally appeared in Activism this week, March 22, 2019.

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.

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.

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