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Why Valeant Pharmaceuticals Intl Inc. and Allergan Inc. Would Be Better Together

Valeant Pharmaceuticals Intl Inc. (TSX: VRX)(NYSE: VRX) and Pershing Square Capital Management LP submitted a hostile bid for Allergan Inc. (NYSE: AGN) months ago, but any potential for a deal appeared dead after both sides exchanged barbs. That is, until early this week when rumours swirled that Valeant will raise its takeover offer for Allergan by about $15 per share.

According to multiple reports, this latest offer will come through this December ahead of an Allergan shareholder meeting unless a rival bid hits beforehand and then Valeant may counter the offer immediately. If Valeant does in fact increase its offer, it will be the third offer for the Botox maker. With the rumoured $15-per-share increase, the latest bid will be about $191 per share or $60 billion in cash and stock. The initial offer was $47 billion, which Allergan said “grossly undervalued the company.”

There is more to it, however, than Valeant’s increased bid. This December at its shareholder meeting, Allergan shareholders will have the opportunity to replace most members of its board, leaving the possibility of a new board that is more amenable to a sale.

A combo would create a pharma powerhouse

The fact of the matter is, if both sides could play nice and come to an agreement they could create a company that would have a much higher value than the standalone components.

Valeant and Allergan have synergistic businesses, specifically their skin-and eye-care businesses. As a combined company, the two could save on marketing and distribution costs and could even find new markets for their products through cross-selling.

While Valeant arguably gains more on the deal (the company is very eager to get its hands on Botox), as a combined unit, the long-term benefits for Allergan are also plentiful.

Allergan’s share price a roadblock?

Another complication right now is Allergan’s share value. Its shares have soared since the takeover interest, from Valeant and previously Activis. While the fact that the company has garnered a great deal of speculator interest has encouraged some investors to buy the company, speculative investment interest relating to the potential for an acquisition is also driving the share price higher — higher than it would be without a deal on the table.

With part of the stock value right now being driven by this speculator interest, if the deal dies, then the company’s stock will likely see a correction as investors turn their focus back to Allergan’s fundamental value as a standalone unit.

Combined unit would provide more value to shareholders

It is fair that Allergan wants to get a good deal for its businesses, but I think it would be in the best interest of both sides to put aside their egos and seriously come to the bargaining table. A combined company would be a pharmaceutical powerhouse that could market and develop far-reaching businesses and benefit economically from combined marketing and distribution efforts. This would create a company that would offer shareholders a better return.

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Fool contributor Leia Klingel has no position in any stocks mentioned. Tom Gardner owns shares of Valeant Pharmaceuticals. The Motley Fool owns shares of Valeant Pharmaceuticals.

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