Financial writers often lament that shareholders are too passive with respect to exercising their rights to oppose management decisions that they disagree with and holding management to account. Well, that can't be said about Elan's (NYSE:ELN) shareholders. Shareholders handed a significant and embarrassing collection of rejections to management, a move that I would argue expresses a very wise lack of confidence in management. With this rejection of management's strategy, I would hope that Elan management sees reason and seeks out the best deal available to sell the company.

SEE: Evaluating A Company’s Management

Back To The Drawing Board...
Regrettably, as of the time of this writing, Elan had not posted the actual voting results of the extraordinary general meeting held to give investors a say on four major proposals – the Theravance (Nasdaq:THRX) royalty agreement, the AOP acquisition, the ELND005 spin-off, and the share buyback plan. What Elan did say in an uncommonly tersely-worded press release was that shareholders had rejected the first three items and accepted only the buyback plan.

At the risk of grandstanding (and not knowing how close the votes were), I'd call this is a significant wake-up call to Elan management that shareholders are not on the same page with them and do not trust them to build value through these transactions. As I've thought each of the proposed transactions (except for the buyback) were ill-conceived and highly likely to destroy shareholder value, this is a good move for shareholders.

Insofar as I understand Elan's corporate governance rules, management does not have the option to ignore these results and proceed. I mention this only because we have seen a few examples recently of companies (not Elan) where shareholders voted against particular board nominees and the company effectively ignored or overruled the votes anyway.

SEE: Ethical Investing: Investor Activism and Shareholder Advocacy

… And Back To The Table
Given that companies always canvas major shareholders ahead of significant meetings/votes like this, Elan management had to know this rejection was coming. This is why I believe Elan announced on Friday (May 14th) that it was proceeding with a formal plant to sell the company.

It's worth noting that Royalty Pharma's bid lapsed with the shareholder approval of the share buyback. Nevertheless, Elan's management “invited” Royalty Pharma to participate in the sale process. Given that no other buyer has publicly expressed any interest in Elan, that's hardly a magnanimous gesture.

To be sure, Elan has some value (especially now that these ill-conceived transactions have been turfed). Elan received over $3 billion from Biogen Idec (Nasdaq:BIIB) for its stake in Tysabri, as well as potentially lucrative contingent payments. What's more, apart from a single pipeline asset (ELND005), there's not really much to the company, so it ought to be a fairly simple transaction to structure.

The question is whether anybody will step up with a better offer than Royalty. Valeant (NYSE:VRX) is seemingly always a potential interested party in such situations, but with the deal for Bausch + Lomb already announced, management will be busy enough (not to mention, with Elan based in Ireland, Valeant can't generate the major tax leverage that often drives the value of so many of its deals). I wouldn't be surprised if financial buyers (private equity) at least investigated a potential deal, at which point the bid price relative to Royalty Pharma would come down to the various opinions on the value of the Tysabri royalty stream and the respective costs of capital.

SEE: Trade Takeover Stocks With Merger Arbitrage

The Bottom Line
If Elan management cannot come up with transactions that its shareholders approve, the whole point of the Tysabri transaction (effectively paying a premium to pull forward the revenue stream) largely evaporates. On the other hand, the deals to acquire a royalty interest in Theravance's COPD drugs and all of orphan drug developer AOP didn't look like value-additive deals either.

For Theravance, this is an unfortunate development, as the Elan transaction basically overvalued its COPD assets. For Elan, we'll see what happens next. A buyout seems much more likely now, and barring a change of management, that would almost certainly be the best way for Elan shareholders to see maximal value for this asset.

At the time of writing, Stephen D. Simpson did not own shares in any of the companies or funds mentioned in this article.

Related Articles
  1. Fundamental Analysis

    Mergers And Acquisitions: Understanding Takeovers

    In the dramatic world of M&As, battleground terms meld with bizarre metaphors to form the language of the game.
  2. Investing Basics

    Warding Off Hostile Takeovers

    The purpose of this article is to provide a general overview of hostile corporate takeovers, while highlighting a general course of action against such activity. This article provides basic information ...
  3. Mutual Funds & ETFs

    Corporate Takeover Defense: A Shareholder's Perspective

    Find out the strategies corporations use to protect themselves from unwanted acquisitions.
  4. Options & Futures

    Pinpoint Takeovers First

    Use these seven steps to discover a takeover before the rest of the market catches on.
  5. Active Trading Fundamentals

    Trade Takeover Stocks With Merger Arbitrage

    This high-risk strategy attempts to profit from price discrepancies that arise during acquisitions.
  6. Bonds & Fixed Income

    Trademarks Of A Takeover Target

    These tips can lead you to little companies with big prospects.
  7. Stock Analysis

    Hologic: An Activist Investment Analysis (HOLX)

    Read about a health care company that attracted activist investors Carl Icahn, Barry Rosenstein and Ralph Whitworth at the same time.
  8. Investing

    How To Make Sure Your Healthcare Costs Do Not Ruin Your Retirement

    The best proactive plan of action for a stable retirement is to understand medical costs, plan ahead, invest properly, and consider supplemental insurance.
  9. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  10. Investing News

    Zika: Study Says This Device Could Protect You

    New research just uncovered an inexpensive, commercially available device that might help fight off the mosquito that carries the dreaded Zika virus.
  1. Does dental insurance cover implants?

    Dental implants have become a widely used procedure in dentistry. Despite their popularity, however, they tend to not be ... Read Full Answer >>
  2. Does dental insurance cover dentures?

    Most full dental insurance policies include some restorative coverage, usually meaning that up to 50% of the cost of dentures ... Read Full Answer >>
  3. Can CareCredit be used for family members?

    CareCredit has become a widely used option when it comes to paying for medical procedures, primarily procedures not typically ... Read Full Answer >>
  4. Can a Flexible Spending Account (FSA) be used for dental?

    Flexible Spending Accounts (FSAs) can be used to pay for dental expenses including deductibles and co-payments with pretax ... Read Full Answer >>
  5. Does dental insurance cover braces?

    Most regular dental plans cover little to none of the costs of braces. The primary focus of regular dental plans is prevention ... Read Full Answer >>
  6. Is dental insurance tax deductible?

    Dental insurance premiums may be tax deductible. To be deductible as a qualifying medical expense, the dental insurance must ... Read Full Answer >>
Trading Center