12 Oct 2015
Professor Randall S Peterson talks to David Pyott, former Allergan CEO, about the takeover of the global pharmaceuticals company he helped to build.
London Business School Dean, Professo Sir Andrew Likierman, David Pyott MSc13 (1980) and Professor Randall S Peterson at an event in May 2015, celebrating 50 years of LBS.
Allergan has been one of the great corporate success stories of recent decades. Its CEO from 1998 until its acquisition by pharmaceutical company Actavis earlier this year was David Pyott MSc13(1980), an alumnus and now a Governor of London Business School. When he joined, Allergan’s sales were just over $1.1bn and its scope was speciality pharmaceuticals, founded in ophthalmology. It wasn’t a small outfit, but it was nowhere near big pharma. Its most well-known product today is Botox – which became around a third of the organisation’s business, having first been approved in 1989. But the organisation’s roots lay with ophthalmic, surgical devices and it remains a leader in specialist eye care – an area of healthcare Pyott is personally passionate about. Pyott was just the third CEO in Allergan’s 65-year-old history. Under his leadership, the organisation enjoyed huge growth, becoming a global company, one of the most respected in the industry, with 10,500 employees and a diverse portfolio and $7.1bn in sales in 2014. But with growth came challenges, the most dramatic of which saw the organisation fighting tooth and nail against a hostile takeover bid by Valeant Pharmaceuticals and its partner, activist investor Bill Ackman (of Pershing Square Capital Management) in 2014.
Hedge fund manager Ackman initiated the aggressive action by quietly buying a 10 per cent share in Allergan before pushing for shareholders to sell to Valeant. Allergan’s board pushed back and the FT called the saga that unfolded “the biggest and most acrimonious takeover battle of 2014”. At the peak of the activity, Pyott was checking into hotels under a false name to avoid the press. The New York Times dubbed him ‘Braveheart’ – a nod to his Scottish heritage, but he jokes that the comparison was double-edged; he is glad he didn’t end up hanged, drawn and quartered like the famous Scottish warrior. Although it surprised Pyott, it was no wonder the organisation was the subject of such fierce battle.
When he became CEO, the company was worth $2bn. In February 2014, on the day that Pershing Square started acquiring stock, it was worth $37bn. “I thought I was going to pass over the company to the next CEO, and Allergan would just continue. It never entered my mind that we would have twin raiders on our tails and be fighting for our lives.” Pyott describes the end of the saga as a happy one, albeit the end of Allergan’s time as an independent company. His disdain for Valeant’s approach, which typically involved slashing resource to keep investors happy, was no secret. “I don’t talk to people who have nothing to offer,” he says bluntly. “The last time I spoke to Ackman he started full of praise, then after five minutes, he said, ‘You don’t seem to be agreeing with my proposals.’ And I said, ‘I would agree with you, Mr Ackman, we’re in a very different place’.” In contrast, Pyott describes the buyout by Actavis as sound. Actavis’ approach was critical – it needed to land a knockout blow that would push Valeant of the table.
No one wanted to see the battle drawn out longer with another player involved and so much at stake. As Pyott puts it: “I was making the point to Actavis, you’ve got to bid a number where Valeant is done; you need to serve one ball at 135 miles an hour, so that it’s game and match over, which is what occurred.” When the deal with Actavis was announced, Allergan was valued at $66bn. On 17 March, St Patrick’s Day 2015, Allergan became an Irish company valued at $71bn. And, in a nod to the success of its new acquisition, the Irish company changed its name to Allergan. Here, Pyott shares his own account of the ferocious takeover attempt and the frantic scenes that followed the company’s astonishing growth.
'It was total war'
“The only day of the week that wasn’t war was Saturday, because the media quietens down,” says Pyott. “We had 41 board meetings between April and December 2014. It was a wild ride, and we had hundreds of pages of information for our directors, to keep them absolutely up to speed. “The first we knew that Ackman and Valeant were mounting a hostile takeover was at 1.30pm on 21 April 2014. A phone call from the Wall Street Journal came in asking our opinion on what we thought about the bid. What bid? Luckily, I was in the California office, and not in Seoul, Sydney or London, and 15 minutes later, Bill Ackman was on CNBC. “The next morning, the stock went through the roof. The most important thing we did was what’s called the poison pill. We assembled the directors to make sure that Ackman could not continue to accumulate the stock over 10 per cent. We wanted time to determine how we could add greater value for our stockholders, versus what was being offered.
“Of course, there were multiple rounds to all of this. As we ramped up our earnings, we had to involve some cost cutting ourselves. If you’re on a different performance timeline, you have to change your strategy. I literally used to tell investors pre-April 21, ‘I’m one of the few CEOs in this industry that can actually think seven to ten years out.’ I was talking about mid-teens earnings per share growth, and they could tell the chance of us doing that was pretty high. And then, you’ve just got to draw it all in for the short term, and see if you can really drive your share price to a point where that number would exceed whatever they put on the table. “We put up an amazing defence, and engaged in our own restructuring programme to take almost $500m out of the business, or 12 per cent of operating expenditure.
Defining our strategy
“Day two was the first board meeting. We needed to define a strategy. Clearly, we needed to appoint all our advisors with the board’s support, and fortunately we’d lined those all up many years before. “There was a call with our advisors every single day. That was the way of keeping the team together and, very quickly, I realised that we then needed to have a second call, of what was really going on, with very, very few people, and always different code numbers, because literally, every means was being used. “I went to the president of the company and the head of R&D and said, I need you to run the company, I’m going to spend 95 per cent of my time fighting the raiders. I was wrong, it was 99 per cent. It was a credit to the president and the whole executive team that we achieved 17 per cent sales growth under that duress, and I think much more important than the numbers was the ethos we created. I only attended one management meeting a month from that moment on, because I said, ‘I’ve absolute trust in what you’re doing’. “We didn’t miss a single R&D milestone, the sales numbers were amazing and, at the end, so many employees said, ‘This is the greatest company we ever worked for’, which is both sad and happy, given that we wished to be independent and finally had to realise that the best alternative was to turn to a white knight, Actavis. I found an activist I really liked in Actavis. Happily, it is changing its name to Allergan, so that feels good for culture. There is a somewhat happy end to the tale.
“Clearly the people under the greatest pressure publicly were the board of directors. We were being vilified by the opposing forces. You realise very quickly which journalists are friends and which are foes as they’re being used as a mouthpiece to assail you. Fortunately there was a great deal of continuity on the board. Many had been with the company and the team for a long time, so they knew the internal strengths of Allergan, and the most recent director who joined had just gone through exactly the same experience. “Among the management team, basically only ten of us worked daily on how to take all the shots and stop them, as well as work out how to go back on the counter attack. That team was the CFO, the treasurer, investor relations, public relations and a subset of lawyers, because unfortunately there are so many legal ramifications. And then in large meetings with all employees, I’d say, ‘The other 10,000 of you had better do a really good job, otherwise my story is going to get really hard to tell.’ People understood this exactly.
“I could separate the running of the organisation from fighting the takeover because of the stability and continuity of the team” “When we looked at making acquisitions, we were aware to be careful not to dilute our core”
A tale of two strategies
“I came up with the idea to separate the running of the organisation from fighting the takeover, and the reason I could do it was because of the stability and continuity of the team. “We told the executive committee at least once a month, beyond what they knew from the hallway, what was really going on. For the broader employee group, we’d have a briefing about every few weeks, so that we were as open as we could be. People understood there was a real reason to keep their lips absolutely sealed, and that worked pretty much 98 per cent of the time. It was a little like a family company. There was real connectivity, but I used to point out to the groups before the old team got too comfortable, ‘Let’s be clear: it’s a family, but it’s a tough family’.
From long to short term
“Fortunately, there had been a couple of antecedents. When I was hired in 1998 as second CEO in the company’s history it wasn’t just business as usual. I asked for 33 per cent global overhead cut, which got people’s attention, and we actually took out 22 per cent. They knew when we said something we meant it. Then, in the recession when we didn’t know how far the business would go down, we immediately cut five per cent of operating expenditure. “Under assault, we started the restructuring programme in mid-May 2014 because investors were telling us to get the earnings per share to $10 by 2016. You realise even so-called long-term investors actually aren’t very long term at all. We had 30 members of middle and senior management on that team. I told them you’ve got to turn this around in six weeks, and that’s exactly what we did.
What I would do differently
“Even before the attack occurred, we should have deployed our balance sheet more aggressively, so we didn’t have cash. I wouldn’t say we were a risk-averse organisation or board of directors. But when we looked at making acquisitions, we were aware to be careful not to dilute our core. Our bar was set pretty high and, with hindsight, we should have probably been less discerning. Even during what I call the period of hostilities, we should have probably worked on some other back-up plans.
“People would ask me how Allergan could succeed, even in ophthalmology, competing against little companies like Pfizer and Merck Sharp & Dohme? Well, neither of them is in ophthalmology any more. It shows if you’re focused and determined in your area of strength, you can keep growing and innovating.” (Allergan has continued to innovate in ophthalmology).
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Pyott’s leadership style: what lessons can you take?
Embrace your individuality. One of the interesting things about leadership is everybody has a different brand. It’s what works for you as an individual, and, when it comes to the weaker parts of your leadership quotient, you would be wise to get advice from other people who are experts in that area.
Be a good communicator. I’d say I have an ability to deal with not just senior people but middle managers, sales reps and scientists to talk in a language they understand, and make them feel that they’re part of the team. And, because of my very long tenure, most people knew me.
Diversity and trust are key in teams. Choose people from very different backgrounds in terms of both personal and business experience. And if you can create high levels of trust, it’s a great thing. I only attended one management meeting a month from the moment we started fighting the raiders because I had absolute trust in what my team were doing.
Get your facts straight. I believe in a lot of control. I’m not a control freak, but I was very well informed, and I don’t do trick questions. People knew if they gave me a nonsense answer, I’d say, “That number doesn’t seem right,” or “Are you sure about that fact?”
Know when to regroup. Throughout this whole period there were some pretty bad days. I did feel like the Scottish king, Robert the Bruce, in the cave a couple of times; I was thinking, it’s time to bow out.
I had to have the ability to stop the train and regroup. I took a couple of weeks of vacation to go on retreat. I needed to think, to recover, and I think that’s a great discipline that we all need. With the bombardment of information, you’ve got to be able to have an ability to step back and look down, and say, so what? Focus on what really counts, what has to change, what has to be done.
Live your values. I’m not very good at that mission and values thing because I have difficulty remembering it, I must confess. However, at Allergan I think we really did live our values in terms of ethicalapproach, entrepreneurial behaviour and leading from the front.
Put your team and company first and you’ll usually get the right outcome. All through the process there were people screaming at me to take the money. All sorts of innuendos were made including questions over whether I was just trying to keep my own job, which was totally ridiculous when you look at how many options and shares I owned. But later on, people said, you’re one of the few CEOs that only cared about the company and not their own personal bank account.
Review your own performance. Like most companies, we had reward by performance against MBOs (management by objectives), and we were pretty strict at those. I was probably one of the few CEOs that actually wrote my own MBOs and, more importantly, a tough work performance review in great detail, and so there was no nonsense of “I’m wonderful and I walk on water…”
Illustrations: Cedar Communications